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Volcan Compania Minera Stock – Investment Analysis

Common Stock: Volcan Compania Minera (VOLCABC1)

Current Market Price: $0.78 PEN ($0.21 USD)

Market Capitalization: $3.2 Billion PEN ($871 Million USD)

**Note: All values in this article are expressed in United States Dollars (USD) unless otherwise noted.

Volcan Compania Minera (VOLCABC1) - Stock Chart
Volcan Compania Minera (VOLCABC1) – Stock Chart

Volcan Compania Minera Stock – Summary of the Company

Volcan Compania Minera is a Peruvian mining company focused of the acquisition, exploration, development, and operation of mineral properties in Peru. Most of their revenue comes from zinc and lead, but they also produce relevant amounts of copper, gold, and silver. In addition to mining the company owns 13 hydroelectric power facilities.

Volcan was originally founded in 1943 and incorporated in its current form in 1998. The company is headquartered in Lima, Peru.

Revenue and Cost Analysis

Volcan had sales of $743.6 million in 2019, a decrease from $775.1 million in 2018. Their COGS was $596.4 million in 2019, representing a gross margin of 20%, a significant deterioration compared to 29.5% in 2018.

The company had a net loss of $70.3 million in 2019, a significant deterioration compared to a profit of $29.4 million in 2018, which represented a profit margin of 3.8%.

Volcan Compania Minera - Revenue by Product
Volcan Compania Minera – Revenue by Product

Balance Sheet Analysis

Volcan has a weak balance sheet. The company has a weak liquidity position and is leveraged, with significant liabilities outstanding.

It is also worth noting the company uses derivatives to hedge its commodity price and currency exposures. Investors should analyze this derivatives book in detail before investing.

Volcan Compania Minera – Debt Analysis

As of year-end 2019 the company has $800.8 million in total debt outstanding, $224.5 million of which is classified as current.

Volcan Compania Minera -  Debt Table
Volcan Compania Minera – Debt Table

Fitch has rated the company’s debt as BB+, meaning the company’s debt is considered non-investment grade.

Volcan Compania Minera Stock – Share Dynamics and Capital Structure

As of year-end 2019 the company has 1.63 billion class A shares outstanding and 2.44 billion class B shares with a preferred dividend outstanding. Total shares outstanding is around 4 billion shares.

Volcan is a subsidiary of Glencore, who owns a total economic interest of 23%.

Volcan Compania Minera Stock – Dividends

The company did not pay a dividend in 2019.

Volcan Compania Minera Stock – 2 Metrics to Consider

Debt to Equity Ratio

Total Liabilities/Total Share Holder Equity

$1.6 billion / $570.7 million = 2.8

A debt to equity ratio of 2.8 indicates that Volcan is leveraged and relies heavily on debt financing to fund itself.

Working Capital Ratio

Current Assets/Current Liabilities

$488 million / $700 million = .7

A working capital ratio of .7 indicates a weak liquidity position. Volcan may have problems meeting its near term obligations.

Volcan Compania Minera Stock – Summary and Conclusions

Volcan is large zinc and lead miner. They have a diversified portfolio of assets in Peru that includes some silver and copper production as well as hydroelectric power. However the company is in poor financial health. Their liquidity position is weak and they are leveraged.

Given the company’s financial position and my lack of interest in base metals investments, I will not invest in Volcan stock. Should my view on the base metals market change, I will revisit Volcan since they have a scale worth considering.

For now I would prefer to invest in precious metals miners, such as Fortuna Silver.

Disclaimer

This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.

This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.

Patrick Flood, CFA

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