2018 ANNUAL REPORT 2018 ANNUAL REPORT T REPOR AL ANNU VOLCAN 2018 Volcan Compañía Minera S.A.A. Mail: [email protected] Address: Avenida Manuel Olguín N° 375, Santiago de Surco, Lima - Perú Website: www.volcan.com.pe 2/2 2018 ANNUAL REPORT qDISCLAIMER This document contains accurate and sufficient Lima, March 20, 2019 information about Volcan Compañía Minera S.A.A.’s business activities in 2018. Regardless of the issuer’s liability, the undersigned are responsible for the content herein, in accordance with applicable laws. José Picasso Salinas Chairman of the board Juan Ignacio Rosado Gómez de la Torre Chief executive officer CONTENTS 6 16 22 LETTER TO MACROECONOMIC OUR COMPANY SHAREHOLDERS ENVIRONMENT 32 40 46 BOARD OF DIRECTORS PRINCIPAL ORE RESERVES AND AND SENIOR INDICATORS RESOURCES MANAGEMENT 56 94 106 MINING OPERATIONS EXPLORATIONS AND BUSINESS GROWTH MANAGEMENT 110 118 122 ANALYSIS OF RESULTS ENERGY SAFETY, HR, AND INVESTMENTS CORPORATE SOCIAL RESPONSIBILITY AND ENVIRONMENT 154 172 180 AUDITED FINANCIAL LEGAL AFFAIRS STOCK INFORMATION STATEMENTS 188 CORPORATE INFORMATION 6/7 2018 ANNUAL REPORT 01. LETTER TO SHAREHOLDERS India reached a growth rate of 7.2% in 2018, in comparison with 6.7% in 2017, DEAR SHAREHOLDERS, In 2018, our country thanks to the strong expansion in consumption and investment in response to reforms implemented since 2014. maintained growth In 2018, our country maintained growth rates above the average for the rates above the region despite facing an exceedingly complex internal political scenario and 2018 showed a certain degree of volatility in financial markets, due to US- volatile international outlook. The most important events occurring in the China trade tensions and the change in expectations in the adjusted US average for the international political scene included the North Korea-South Korea agreement Federal Reserve policy interest rate. European markets were affected by Brexit region despite facing to denuclearize the Korean peninsula and begin a definitive peace process, and the EU approval of Italy’s public budget. the US-China trade war, Brexit negotiations, victories of the regime of Bashar an exceedingly al Assad supported by Russia in Syria, the ceasefire in Yemen in December, The national political sphere in 2018 was marked by several important events. complex internal the political and economic crisis in Venezuela, and the presidential elections After Congress again sought to impeach President Pedro Pablo Kuczynski, he political scenario and in Brazil won by right-wing candidate Jair Bolsonaro, in Mexico by left-wing resigned the presidency in March. On March 23, 2018, Congress accepted candidate Andrés Manuel López Obrador and in Colombia by right-center volatile international candidate Iván Duque. Meanwhile in Europe, Guiseppe Conte is sworn in as new head of the Italian government and socialist Pedro Sánchez assumes outlook power in Spain after ousting conservative Mariano Rajoy with an unparalleled move to censor, supported by the radical left and Basque and Catalan independents and nationalists. In this context, the global economy grew 3.7% in 2018, a rate slightly below the 3.8% growth the prior year. This decreased dynamism is associated with the lower growth in China as a result of the high levels of uncertainty generated in global markets through the promotion of US protectionist policies. This was such that the Chinese government announced the adoption of tax cuts and financial measures such as increased loans to Chinese companies to stimulate higher growth. The Eurozone showed a recessive growth rate, from 2.2% in 2017 to 1.8% in 2018, due to weakened macroeconomic conditions in the primary economies of the region during the second half of the year. Specifically, growth in Germany was affected by geopolitical turbulence and the adoption of new environmental standards that affected automobile production. The US economy showed greater dynamism, with a 2.9% growth in 2018 in comparison with 2.2% in 2017, a reduction in unemployment at historically low levels (3.9%), greater public spending and expansion of private investments. 8/9 2018 ANNUAL REPORT The mining and the president's resignation and, in accordance with the Constitution, the private consumption thanks to the recovery of the consumer confidence Metal prices during presidency was assumed by Martín Vizcarra, first Vice President of the Republic. indexes and the accelerated growth of formal employment. Along these lines, hydrocarbon investment also showed greater dynamism. Private investment went from the early months of sector went from In July, media channels published audio recordings that revealed corruption 0.2% growth in 2017 to 4.4% growth in 2018 and public investment went 2018 maintained in the justice system, which led to the resignation of Duberlí Rodriguez from from a 2.3% drop in 2017 to an 8.4% growth in 2018. In consequence, private 3.2% growth in the presidency of the Judicial Branch. President Martín Vizcarra addressed investment went from representing 17.3% of the GDP in 2017 to representing the upward 2017 to a -1.3% the nation on July 28 and announced four political and legal reforms to be 17.6% of the GDP in 2018, while public investment grew from 4.5% of the trend that were contraction in 2018 submitted to referendum in December. GDP in 2017 to 4.8% of the GDP in 2018. reverted both due as a result of lower In October, the humanitarian pardon granted to Alberto Fujimori was annulled Disaggregated by sector, the fishing sector grew 39.7%, thanks to greater to the uncertainty gold production. and Keiko Fujimori, leader of Fuerza Popular, was sentenced to 36 months of extraction of anchovies (6.1 million MT), the highest level in the past seven generated by the US- preventive detention for asset laundering. Regional and municipal elections years. Non-primary sectors grew 4.2%, greater than the 2.3% expansion in Production of copper, were held in Peru, where Acción Popular candidate Mr. Jorge Muñoz was 2017, due to the greater dynamism in construction and manufacturing. China trade war and silver and lead was elected mayor of Lima and left-wing candidates triumphed in several parts the arrival of new of the country. In November, Congress approved the final report of the Lava The mining and hydrocarbon sector went from 3.2% growth in 2017 to a -1.3% lower on a national Jato commission. Also in November, ex-President Alan Garcia was ordered to contraction in 2018 as a result of lower gold production. Production of copper, productions on the level remain in the country for 18 months for alleged crimes of collusion and asset silver and lead was lower on a national level. supply end laundering. The ex-President requested political asylum from the government of Uruguay, which was rejected days later. In December, the Supreme Court The current balance of payments had a deficit of -1.5% of the GDP, greater elected José Luis Lecaros as President of the Judicial Branch. Meanwhile the than the -1.2% deficit seen in 2017, however higher prices for raw materials, fiscal team and the ad hoc attorney’s office culminated the negotiation of a especially copper, gold and zinc enabled an increase in the balance of trade plea bargain with Odebrecht, the company under investigation by the Lava from USD 6,571 million in 2017 to USD 7,049 million in 2018. Because of Jato case, wherein the company agreed to provide proof to the Prosecutors’ the higher deficit, the Peruvian Sol depreciated 4.17%, closing 2018 at 3.37 office and to pay the State for civil damages in the amount of 610 million PEN/USD. National inflation ended the year at 2.5%, within the target range of Peruvian soles over 15 years. Peru’s Central Bank (between 1.0% and 3.0%). By national referendum, the government approved the reform of the structure Metal prices during the early months of 2018 maintained the upward trend of and duties of the National Justice Committee (Junta Nacional de Justicia), the final months of 2017, both for precious metals and for base metals, which the no re-election of congresspeople, and the regulation of political party gave stability to the mining industry in general. Zinc prices reached 3,606 USD/ financing, while also rejecting the reform of a bicameral Congress. President MT in February 2018, reaching its historic high since July 2007. Lead followed Martín Vizcarra promoted the rejection of this last reform as this proposal was suit, reaching a peak of 2,589 USD/MT. However, positive expectations were altered by Congress to include restrictions. reverted both due to the uncertainty generated by the US-China trade war and the arrival of new productions on the supply end. In terms of precious metals, On December 31, 2018, national prosecutor Pedro Chávarry announced the the US Federal Reserve continued its policy referential interest rate increase to removal of prosecutors Rafael Vela and José Domingo Pérez from the Lava normalize its monetary policy to the detriment of precious metal prices. Gold Jato case. In light of this situation, President Vizcarra indicated that he would prices reached their lowest level in September 2018 at 1,198 USD/oz, breaking present a bill to Congress to declare the Public Ministry in a state of emergency. the 1,200 USD/oz barrier; followed by silver, which decreased to 14.26 USD/ Finally, under pressure from all branches, national prosecutor Pedro Chavarry oz the same month. resigned from his position on January 8, 2019, and the special prosecutors assigned to the Lava Jato case were reinstated. The price of zinc decreased by 24.1% from 3,309 USD/MT at the end of 2017 to 2,511 USD/MT at the close of 2018.