Deloitte.

Calcareos del Pacifico S.A.C.

Review of the methodology used in developing the financial flows that

supports the feasibility study of a cement project

Deloitte Corporate Finance S.A.C.

Las Begonias 441, Floor 6
San Isidro Lima, Peru
 Deloitte.

31st of August, 2010

Mir.
Calcareos del Pacifico S.A.C.
Jr. Cuzco - 425 - 809
Lima 1

Attention: Mr. Benjamin Loza Vizcarra

General Manager

Dear Sir:

As you know, Deloitte was appointed by Calcareos del Pacifico S.A.C. as a financial
consultant to be responsible for the review of the methodology used in the elaboration of
cash flows that sustain the viability of a cement Project. Thus, and according to the
timeframe proposed, we present you our Final Review Report of the methodology used
in the elaboration of cash flows that sustain the viability of a cement Project.
We have executed the procedures established with Calcareos del Pacifico S.A.C.
according to the proposal 086-2010/DCF, of the 27th of July of 2010, in order to assist
in the review of the methodology used in the elaboration of cash flows that sustain the
viability of a cement Project.

The sufficiency of this procedures agreed is responsibility of the users of this report,
consequently, Deloitte makes no manifestations regarding the sufficiency of the same
for the purpose for which this report has been requested, or for any other purpose.

This report includes the following sections:

Section I Limitations
Section II Sector analysis
Section III About the project
Section IV Review of the methodology used in developing the financial flows
Section V Conclusions
Section VI Appendix

Deloitte's responsibility is limited to carrying out the agreed procedures and the report
the results, with the limitations contained herein. Deloitte is not responsible for updating
the procedures or for applying additional ones.

The Final Report subject to discussion is issued only for the information and use of
Calcareos del Pacifico S.A.C., for the purpose described in the introductory paragraph
of this report. Report may be distributed without the consent of Deloitte to control
organism that may require them to comply with audit functions, and, if required, to the
external auditors of the Company.
Yours sincerely,

Andres Remezzano
Senior Manager
Financial Advisory Services
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Content

1. Limitations 5
2. Sector analysis 7
2.1. Macroeconomic Environment 7
2.2. Construction Sector 9
2.3. Cement 10
3. About the project 17
3.1. Background 17
3.2. Location 17
3.3. Geological Survey and Reserves Cubage: Concession Pacific 5-2003 17
3.4. Production Process 19
3.5. Types of cement 20
4. Review of the methodology used in developing the financial flows 21
4.1 Revenues 21
4.2 Costs and expenses 22
4.3. Net income 23
4.4. Investments 24
4.5. Economic and financial flow 24
4.6. Discount rate 25
4.7. Net present value and recovery period of the project 26
5. Conclusions 28
6. Appendix 29

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1. Limitations
The liability of Deloitte Corporate Finance S.A.C. (hereinafter "Deloitte") is limited to ova
perform the procedures outlined in the services proposal and to report the results
obtained, with the limitations contained herein.

In that sense, Deloitte did not undertake a review on the performance of Calcáreos del
Pacifico S.A.C. (hereinafter "Calcáreos") nor a review of its cash flows. Our analysis will
006 cover the review of the methodology used in the preparation of financial flows that
supports the viability of the cement project. Deloitte won't express about the 001)
reasonableness of the assumptions used for the various macroeconomic and
microeconomic variables that supports the cash flows of the project. Deloitte is not 010
responsible for updating the procedures to apply or implement additional procedures to
those in the proposed services.

Calcáreos is responsible for providing accurate and complete information. The

information provided by Calcareos to Deloitte for the preparation of this report is detailed
in Appendix No. 1. Deloitte is not responsible for the accuracy or integrity of information
provided by Calcareos or on its behalf, even if we had reasons to know or should have
known about such inaccuracy or lack of integrity

Calcareos may be forced to modify the scope of work. If so, this situation must be
communicated to Deloitte immediately, so that changes are made corresponding to that
scope

As it is conventional in this type of work, the reports prepared by Deloitte will be subject
to the following restrictions:

 It may not be used for judicial purposes.

 Neither our Firm, nor any other natural or legal person signing or associated with
•01 the report will be required by the company to testify or appear before judges
or addressing other legal proceedings relating to this report.

 Under no circumstances, our firm, its partners and staff will be responsible for
loss, damage, costs or expenses punitive, incidental, financials, specials and/or
other consequences (including, without limitation, lost profits, opportunity costs,
etc.) incurred in the performance of professional services, unless fraud or
negligence is proved inexcusable.

We understand that our reports will be exclusively used by Calcareos and will be used
with the objective of making internal decisions. Therefore, the report may not be
distributed to ova other natural or legal persons, except in the following cases:

 Deloitte shall be notified in respect of any distribution of the report, which in turn
must be approved in advance.

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 The receiver must commit in writing not to distribute the report to any other person
or entity.

 The report should not be distributed in part.

In case the report shall be distributed with the consent of Deloitte, Calc6reos must take
the precautions to ensure the confidentiality of information, methods, applications and
assessments made by our firm.

None of the consultants, partners and professionals of Deloitte has an economic interest
woo on Calcareos, ensuring their independence. The fees charged for the execution of
this work are not based and are unrelated to the values reported.

Deloitte shall have no liability to update the report to events occurring after the date of
fulfillment.

Our organization takes no responsibility for any damage caused to third parties as a
result poi of the circulation, publication, reproduction or use of the report.

Finally, the conclusions of our report do not constitute a recommendation for granting
the iwob credit requested for the project or any opinion regarding Calcareos financial
capability to repay a loan.

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2. Sector analysis

2.1. Macroeconomic Environment

Gross Domestic Product

In June 2010, the national GDP increased by 11.9%, on an annual basis, registering ten
months of continuous growth'. This due to the growth of construction sector (22.7%),
manufacturing sector (21.6%), business services sector (12.3%), finance and insurance
sector (11.6%) and other services sector (11.1%).

According to the projections of the Economist Intelligence Unit (EIU), it is expected that,
for years 2010 and 2011, the Peruvian economy will grow at a rate of 6.7% and 4.1%
respectively, as a result of higher private consumption and an improvement in the level
of exports. The slower growth in 2011 reflects deterioration in external conditions and
uncertainty expected due to the presidential election in April 2011.

Peruvian GDP
(% change)

Source: INEI.
*Projections.

Inflation and Exchange Rate According to figures published by INEI, inflation, for July
2010, amounted 0.36%, accumulating 1.79% so far this year. It should be noted that
inflation has remained at low rates in the last year as a result of the international financial
crisis.

-----------------------------------------------------------
National Institute of Statistics and Informatics (INEI).

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Inflation
(%)
Jul Jan – Jul 2010 Aug 09-Jul 10
Food and Drinks 0.48 3.10 2.87
Clothing and footwear 0.16 1.20 1.88
Rental housing, electricity, among 0.66 1.60 0.45
oth
Furniture and fixtures 0.01 0.02 0.13
Health Care 0.02 1.12 1.77
Transport & Communications 0.58 0.72 1.49
Education and culture 0.04 1.64 2.02
Other goods and services 0.14 0.57 1.42
Total inflation 0.36 1.79 1.82

Source: INEI.

According to the projections of the Economist Intelligence Unit (EIU), it is expected that
inflation will rise in 2.6% and 2.5%, for years 2010 and 2011, respectively.

Inflation
(% at end of year)

Source: INEI.
*Projections.

On the other hand, the Peruvian Nuevo Sol continues to appreciate gradually against
the North American dollar due to the weakening that the dollar has suffered as a result
of the global financial crisis. Thus, the month of July ended with an exchange rate of
S/.2.823 per US$1.

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Exchange rate

Source: BCRP.

2.2. Construction Sector

The growth of construction sector rose, during the first quarter of 2010, to 16.8%, thus it
was the most dynamic sector.

Quarterly Peruvian GDP

(over same quarter last year)
Sector 2009/2008 2010/2009
IQ IIQ IIIQ IVQ Year IQ
Agriculture, hunting and forestry 4.4 1.1 2.3 1.9 2.3 6.0
Fisheries -14.0 1.8 -5.9 -14.5 -7.9 3.8
Minning and hidrocarbons 3.4 0.3 0.1 -1.2 0.6 -14.2
Manufacture -4.2 -11.6 -10.3 -2.4 -7.2 0.1
Electricity and water 1.2 0.3 -0.3 3.4 1.2 7.3
Construction 5.2 -1.0 4.9 14.8 6.1 6.4
Commerce 0.4 -2.1 -1.8 2.2 -0.3 16.8
Other 4.4 3.5 3.2 5.9 4.3 8.1
Total GDP 1.9 -1.2 -0.6 3.4 -0.9 4.4
1/ Includes Government Services and Other Services
Source: INEI.

As it can be seen, the dynamism in the construction sector is the result of the increased
domestic consumption of cement (growth of 22.2% in June).

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Construccion sector GDP
(June 2010)
Component % change 2010/2009
Jun Jan-Jun
Domestic consumption of cement 22.2 18.8
Physical progress of works 53.0 33.5
Non-concrete housing 2.2 2.2
Construction sector 22.7 19.2
Source: INEI.

According to Maximixe, the construction sector could grow at an annual rate of 8.7%
between the years 2010 to 2013.

2.3. Cement

Current Situation

In June 2010 local cement shipments amounted to 657 million tons, recording an annual
increase rate of 20.2%. This increase is the result of three main factors: (i) the growth of
the Peruvian economy, (ii) the higher number of infrastructure projects and commercial
mining companies, and (iii) the dynamism observed in the real estate sector.

Local cement shipments

(thousand tons)

Source: INEI.

Products

Among the products in the cement market are the following:

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Cement market products

Type. Description
Cement Portland For general use in concrete works and masonry. Recommended for
edificiones buildings, houses. apartments.
It normally shipped in bulk or in bags of 42.5kg.
Cement Portland Type II Concrete work in general. Suitable for construction of buildings, bridges
and port works.
Shipped in bulk or in bags of 42.5kg.

Cement Portland Type V Used on construction sites where high strength is required of sulfates.
Recommended in channel structures. culverts and tunnels. Shipped in
bulk or in bags of 42.5 kg

Portland Type I (OM) For general construction as specified by the manufacturer.

Moderate sulfate resistance.
Shipped in bulk or in bags of 42.5 kg.
Cement Portland Further treatment in mortars and coatings.
Puzolanico IP Moderate sulfate resistance, low heat of hydration and impermeability.
Shipped in bulk or in bags of 42.5 kg Moderate sulfate resistance.
Cement Portland Type MS Moderate sulfate resistance.
Recommended for buildings exposed to sea.
Cement Portland For use in construction that did not require special property.
Cornpuesto Type 1Co Formulated with microfiller limestone.
Source: Maximixe.

Production

According to information published by INEI, in 2009, cement production rose to 7.3

million metric tons (MT), recording an increase of 4.4%, on an annual basis. Similarly.
between January and May 2010, the level of cement production totaled 3.2 million MT,
representing an increase of 17.9%, over same period last year. These increases in
production levels were driven by real estate development and progress of works
executed by the Central Government.

It is noteworthy that, between 2003 and 2009, the portland cement production recorded
an annual average growth rate of 8.7%, accumulating a total growth of 65.0% (3.745.9
thousand MT). This growth was due to the high demand for housing that encourages
massive construction of apartments.
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Cement production
(metric tons)

Source: INEI.
*January to June.

According to projections made by Maximixe, a growth rate of 7.3% for cement production
is expected for year 2010, mainly, due to the dynamics of the construction sector.

Main Participants

Peruvian cement market is highly concentrated; the top four companies have a market
share of 93.3%.

*Cementos Lima: It is the most important producer of cement in Peru, with 41.4% market
share. This company offers the following products:

 Cement Portland Type I (Cemento Sol).

 Cement Portland Type I BA (low alkali).
 Cement Portland Puzolanico Type IP (Supercemento ATLAS).
 Cement Portland Type II BA (low alkali).
 Cement Portland Type V BA (low alkali).
 Clinker Type I. Clinker Type I BA (low alkali).
 Clinker Type II BA (low alkali).
 Clinker Type V BA (low alkali).

Cementos Pacasmayo: Is a privately owned industrial and mining company whose

purpose is the production and commercialization of cement, lime, blocks, concrete and
aggregates. It has a cement plant in Pacasmayo, a cement plant in Rioja and

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pre-mixed concrete plants in Chimbote, Trujillo, Pacasmayo, Chiclayo, Piura and
Cajamarca.

 Cemento Andino: Company dedicated to the production and commercialization of

cement, founded in 1952. Among the products offered are:
 Cement Portland Type I
 Cement Portland Type I (PM)
 Cement Portland Type II
 Cement Portland Type V
 Cemento Yura: Company member of Group Gloria, dedicated to the production of
cement and concrete. In cements is the fourth producer nationwide, leading the
market supply in the southern Andean and coast of Peru. In particular, serves the
construction industry with ready-mix concrete products and prefabricated concrete.

Main participants

Source: Maximixe.

Supply by Region

The cement market can be divided into three zones:

 North: Cement companies Pacasmayo and Cementos Selva, both part of the
Hochschild Group, covers the demand of the north of the country.

 Central: The Rizo Patrón group, with its companies Cementos Lima and Cemento
Andino, distributes its products in the Midwest. Additionally, in Lima is operating the
independent company Caliza Cementos Lima.

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 South: Cementos Sur and Cementos Yura have coverage of the south of the country.
These companies belong to the group Rodriguez Banda.

Location of Peruvian cement

companies

Source: Maximize.

Domestic Consumption

During 2009, domestic consumption of cement amounted to 7,256.8 thousand MT,

recording an increase of 4.6%, year over year (6936.3 thousand MT in 2008). This
increase was encouraged by the implementation of investment projects, mainly by the
public sector and market development for housing and offices.

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Domestic consumption of cement

(thousand tons)

Source:INEI
*January to May.

In May 2010, domestic consumption of cement increased by 18.2%, over same month
last year, going from 2,767.8 thousand MT to 3,270.7 thousand TM, due to the dynamism
observed in the construction sector.

Imports

According to INEI, in 2009, 173.6 thousand tons of cement was imported, which
represented a decrease of 21.6% year over year. This drop in cement imports was due
to the close of 14 overseas plants and the temporarily stoppage of activities of other
plants. This was as a result of the decline in construction spending and sales of cement
in response to the effects of the global crisis.

During May 2010, 10.8 thousand tons of cement was imported, recording a decrease
rate of 45.3% over same month last year. It should be noted that between January and
May 2010, 88 thousand tons of cement were imported, which represents approximately
50.7% of total 2009 imports, and this is due to increased in the domestic production of
cement.

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Cement imports
(thousand tons)

Source: INEI.

Exports

As for the export of cement during the year 2009, this amounted to 1.9 miles of TM,
according to figures published by INEI. This represented a decrease of 97.0%, year over
year, due to the sharp drop in shipments to the United States.

Between January and May this year, 1.2 thousand MT have been exported, recording
an increase of 1.4 times, over same period for last year. This increase was driven by the
increased demands of Colombia and Chile.

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Summary total reserves
Leyes
Block Volume P.E. M.T.
CO3Mg CO3Ca CO3
A 3,990,950 2.2 8,780,090 2.35 81.18 83.92
B 16,073,500 2.2 35,361,700 1.99 79.96 81.88
C 6,241,300 2.2 13,730,860 1.68 78.65 80.59
TOTAL 26,305,750 57,872,650
Source: Calc.areos del Pacifico S.A.C.

Thus, the study concluded that the limestone that are presented in Blocks A, B and C of
the Pacific Concession 5, by its contents of CaCO3, CO3Mg and CaO, lithological
characteristics and its location relative to the main access roads should be considered
as important reserves, for exploitation in the immediate term.

It should be noted that one of the recommendations of the report is to conduct a

prospective study in more detail in order to establish the real power of the limestone
strata wa0Q1 found and mineral laws.

Given the importance of the impact of the level of reserves in the projection of cash flows
of the project, and given that Deloitte has not verified geological reserves, the Report of
Geological Reserves Certification Concession Pacific 5 - Code N°05-00147-003,
prepared by an independent third party (Mr. Esteban Quispe Sanchez) was reviewed.
Annex N ° 2 of this report includes the certification report.

The certification report was aimed at "Certifying the proven and probable geological
reserves of carbonate rocks, considering their chemical characteristics as CO3, CO3Ca,
CO3Mg, CaO, SiO2".

Thus, the report stated that geological information of the field and the results of chemical
analysis made by Laboratorios Analiticos del Sur for samples collected in the Concession
Pacific - 5 were verified.

As regards to reserves, the report indicates that it was observed were considered as
reserves, the limestone reserves that are above the basic level of access that crosses
the 1:11 limestone outcrops in the area of study. This also indicates that it was verified
the location of reserves relative to the stratigraphic position occupied by the deposits.

In addition, the certification report shows the detailed results of proven reserves for each
block and trench. Below are summaries of each block reserves.

Summary Block A Reserves

Distan factors Laws

Trench Area Volume
ce CO3Mg CO3Ca CO3 CO3Mg CO3Ca CO3
1 --- 1,243 -- 1,578.61 86,388.50 88,253.00 1.27 69.50 71.00
2 200 4,731 597,400 10,029.80 402,621.83 413,405.52 2.12 85.10 87.38
3 200 8,650 1,338,100 21,365,50 710,597.50 735,769.00 2.47 82.15 85.06
4 300 5,053 2,055,450 13,188.33 397,822.69 413,790.17 2.61 78.73 81.89
TOTAL 19,677 3,990,950 2.35 81.18 83.92
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3. About the project

Calcareos del Pacifico S.A.C. is a Peruvian company is orientated to the cement market
(domestic and international). It should be noted that this Peruvian group owns the mining
concession Pacific 5, located in the south of the town of Huambo, district of Lluta,
province of Caylloma, department of Arequipa.

The mission of the company is:

"Our mission is to implement a modern plant, leading in the industry with highly
levels of efficiency. Also, we intend to operate the main environmental standards
and provide a market leading industry standard for Peru. taking an active role in
the development of export facilities for cement at the nearby of Matarani port".

The vision of the company is:

"Our vision is to increase cement manufacturing capacity to meet growing

demand for cement in the country at a more competitive cost".

Calcareos request a loan of approximately US$35 million to a foreign financial institution

(Wachovia) for the development of a cement project in Arequipa.

3.2 Location

The project will be located in Matarani, in the department of Arequipa. Matarani is located
about 452 miles south of El Callao, in Lima Metropolitana. Matarani Port serves the
southern region of Peru, as well as the Bolivian cities of Santa Cruz, La Paz, Potosi,
among others.

In 1999, the port was given in concession to the Terminal Internacional del Sur S.A.
(TISUR). Since then, TISUR has developed and increased the cargo transit through its
terminal, in direct competition with the port of Arica in Chile. It is expected that the area
of influence increase with the integration projects in Brazil and Bolivia.

3.3 Geological Survey and Reserves Cubage : Concessions Pacific 5-2003

According to the Geological Survey and Reserves Cubage: Concession Pacific 5-2003,
the total reserves of limestone rises to 57.9 million tons. approximately, with 8.8 million
tonnes in block A, 35.4 million MT in Block B and 13.7 million MT in Block C.

------------------------------------------------------------------------
Report prepared by engineers Fernando Zegarra and Jose Meza.

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. Summary Block B Reserves

Source: Report of Geological Reserves Certification Concession Pacific 5 - Code N°05-00147-003

Summary Block C Reserves

Source: Report of Geological Reserves Certification Concession Pacific 5 - Code N°05-00147-003.

In this way, the certification report prepared by Mr. Esteban Quispe Sanchez verifies a
total of 57,872,650 MT limestones as reserves, with 8,780,090 million MT. in Block A,
35,361,700MT in Block B and 13,730,860 MT in Block C. Given the latter, it can be
affirmed that the assumptions related to the level of reserves incorporated by the
company in its projections are reasonable.

3.4. Production Process

Cement is a binder used in civil engineering works. This, when mixed with stone
aggregates and water, creates a uniform mixture, malleable and plastic that hardens by
reacting with water, which is name concrete.

There are a variety of cements that differ depending on the raw materials used as base
and the processes used to produce it (dry processes and wet processes).

The cement manufacturing process involves four main stages:

 Mining and milling of raw materials: The raw material for cement production
(limestone, clay, sand, iron ore and gypsum) is extracted from quarries or mines and,
depending on the hardness and location of the material, apply certain operating
systems and equipment. After extracting the raw material, it is reduced to sizes that
can be processed by oil mills.

 Standardization of raw material: In the wet process, the raw material mixture is
pumped into homogenizing ponds and thence to the kilns where clinker is produced
at temperatures above 1,500°C. In the dry process, the raw material is homogenized
in yards of raw material with the use of special machinery. In this process the
chemical control is more efficient and less energy consumption.

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Production of clinker and cement grinding: The clinker obtained, regardless of the
process used in the process of homogenization is then ground with small
quantities
of gypsum to finally produce cement.

For the development of this project, an estimated investment of US$33.6 million is

required for milling and production of cement and concrete products for national and
international markets.

3.5 Types of cement

There are various types of cement, different in composition, its properties of strength and
durability, and therefore their destinations and uses.

Cement “Portland”

It is the most widely used type of cement as a binder for the preparation of concrete.
Product is obtained by spraying the portland clinker with the addition of one or more
forms of calcium sulphate.

Special portland cements are cements that are obtained in the same way that the
Portland, but have different characteristics because of variations in the percentage of
components that comprise it. Within the special portland cements are: iron Portland and
white cements Portland.

Cement “Puzolánico”

The pozzolan is a stone of acidic nature; it is very reactive and can be obtained at low
Prices. When mixed with lime (in the ratio of 2-1) is obtained the pozzolanic cement.
Pozzolanic cement contains approximately:

55% - 70% of Portland clinker

30% - 45% of pozzolan
2% - 4% gypsum

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4. Review of the methodology used in developing the financial flows

4.1. Revenues

Project income comes from the sale of cement and concrete, these have been projected
considering the following assumptions:
 Installed Capacity: The installed capacity amounts to 1,200 tons of cement per
day, which implies an annual installed capacity of 432,000 tons.
 Production: Annual production of cement will be determined according with the
following levels of use.

Production (% installed Production

Year
capacity) (tons)
1 70% 302,400
2 80% 345,600
3 80% 345,600
4 85% 367,200
5 90% 388,800
6 90% 388,800
7 85% 367,200
8 80% 345,600
9 80% 345,600
10 80% 345,600

Source:Calcareos del Pacifico S.A.C.

The concrete production corresponds to the 21.9% of cement production in tons.

Prices: The sales prices throughout the projection horizon amount to US$128.34 per
ton of cement and US$$65.00 per cubic meter of concrete.
It should be noted that the price of cement used by Calcareos is equivalent to a price
per bag of 42.5kg of S/.18.0 (at an exchange rate of S/.3.30 per US$1).

Considering the assumptions mentioned above, Calcareos has estimated revenues of

US$43.1 million for the first year of operation, which will gradually increase to reach
US$49.3 million by the end of the projection horizon. Deloitte considers adequate the
methodology used by Calcareos for projecting revenue.

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Revenues
(US$ million)

Source: Calcareos del Pacifico S.A.C.

4.2. Costs and expenses

Calcareos made the projection of costs and expenses based on the following
assumptions:
 Costs of sales: It is assumed that the cost of sales represented 80.6% of total
revenues over the projection horizon. These costs consists of the following
components:
 Raw Material Cost: These costs represent, throughout the projection horizon, the
54.0% of total revenues.
 Power & Fuel: These costs represent, throughout the projection horizon, the 8.0%
of total revenues.
 Employee Costs: These costs represent, throughout the projection horizon, the
5.6% of total revenues.
 Other Manufacturing: These costs represent, throughout the projection horizon,
the 3.0% of total revenues.
 Outward Freight: These costs represent, throughout the projection horizon, the
4.0% of total revenues.
 Other Production Costs: These costs represent, throughout the projection
horizon, the 6.0% of total revenues.
 Administrative expenses: These expenses represent, throughout the projection
horizon, the 5.0% of total revenues.

 Other costs: Other costs of US$300 thousand are considered between years 1 and
6, and of US$$400 thousand for the remaining years

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Considering the assumptions mentioned above, Calcareos has estimated costs and
expenses of US$34.8 million for the first year of operation, which will gradually increased
to reach US$39.7 million by the end of the projection horizon. Deloitte considers that the
methodology used for projection of costs of sales and administrative expenses is
reasonable.

Costs of sales
(US$ million)

Source: Calcareos del Pacifico S.A.C.

4.3. Net income

For the calculation of Net Income, Calcareos proceeded to deduct the following concepts
from operating income:
 Depreciation: Calcareos estimated that depreciation would amount to US$1.5
million and will remain constant throughout the projection horizon.
 Taxes: The taxes represent 30% of income before taxes, a percentage that will
remain constant for the entire projection horizon.

Thus, the net income calculated by the company amounts to US$ 3.1 million for the first
projection year and will increase to US$ 3.6 million by the end of the projection horizon.

Deloitte considers that, since the analysis of human resources made by the company
indicates that 67 employees would be needed for the project, distribution of worker
participation should be included to obtain net income. According to Legislative Decree
No. 892, the company should distribute 10% of income before taxes in payments of
employee participation. It should be noted that the incorporation of this payment affects
the level of projected income tax.

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Net income
(US$ million)

Source: Calcareos del Pacifico S.A.C.

4.4. lnvestment

Calcareos calculated a level of investment of approximately US$33.6 million.

FIXED ASSETS 20,500,000

Machinery for Mill 7,000,000
Machinery for Concrete Products 2,000,000
Belt Conveyors 1,500,000
Packing Machine 3,000,000
Storage & Transportation 1,200, 000
Buildings & Warehouse Construction 10,144,147
Sub -Stations Energy & Supplies 1,960,000
Laboratory, Maintenance & Office Equipment 600,000
Landing 2,740,000
WORKING CAPITAL 3,500.000
TOTAL INVESTMENT USS 33,644,147
Source: Calcareos del Pacifico S.A.C.

For the calculation of both the Economic and the Financial Flow, Calcareos has followed
these parameters:
 Economic Flow: To obtain the economic flow, depreciation was added to the net
income.
 Financial Flow: To obtain the financial flow, Calcareos incorporated the flows
associated with the loan (principal, depreciation, interest tax shield), as follows:
 Amortization: It is calculated based on a loan of US$23,550,903 (fixed fee
payment). It would have a grace period of 2 years before the beginning of the
payment. The amortization would increase over the projection horizon.

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 Interests: Corresponds to a fixed rate of 9.0% over the unamortized balance

of the loan of US$23,550,903. Annual interest payment would decline during
the projection horizon
 Tax shield: It is calculated as the 30% (income tax rate) over paid interests.
Thus, the financial flow is calculated using the following formula:
Economic flow - Depreciation - Interest + Tax Shield

4.6. Discount rate

To calculate the cost of equity (COK), Calcareos used the following variables:

Variables Value
Risk free 6.47%
Risk- free (short term) 4.12%
Market return 9.39%
Country risl 2.03%
Beta 1.81
Source. Calcareos del Pacifico S.A.C.

 The risk-free rate corresponds to the geometric average of the annual returns of
T-bonds for 1997 to 2007. This information was obtained from the Reserve Bank
of the United States.
 The short-term risk-free rate corresponds to the geometric average of annual
returns of T-bills for 1997 to 2007. This information was obtained from the
Reserve Bank of the United States.
 The market return corresponds to the arithmetic average of annual returns of the
shares for 1997 to 2007. This information was obtained from the Reserve Bank
of the United States.
 The country risk premium corresponds to that reported by Damodaran.
 The beta used by the company amounted to 1.81. This information corresponds
to that reported by Damodaran for the Cement & Aggregates industry.

The capital cost was determined using the methodology Capital Asset Pricing Model
(CAPM), with the following formula:
Where:
COK = Rf + beta x (rm-rf) + country risk

Where:
 RF: Average risk-free rate from T-Bond.
 Beta: Average beta for cement companies in the United States of America.

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 RM: Return of the market.

 rf: Risk-free rate of money market (T-Bills).
 Gook Country risk: Sovereign risk of Peru.

Also, Calcareos calculated the Weighted Average Cost of Capital (WACC)

considering the following formula:

1004 WACC = COK*40%+rd*60%

Where:
 COK: The COK calculated above.
 Rd: Debt cost.

Thereby, Calcareos calculated a COK of 18.04% and a WACC) of 12.62%.

With regard to the calculation of discount rates, Deloitte considers that:
 According to analysis conducted by Calcareos, debt structure is as follows:

Financing structure US$ Percentaje

Loan 23,550,903 70%
Equity 10,093,244 30%
Total 33,644,147 100%

As can be seen, 70% of the project will be financed through loans, while the 30% of the
project with own capital. However, the company used a different capital structure (60%
financing from third and 40% of capital) for calculating the discount rate; thus, the
discount rate calculated do not corresponds to the conditions of the project.

For the calculation of the market premium, Calcareos has calculated the difference
between the return on equities and the return of fixed income. However, the company
used the short-term return of fixed income, when it should have used the long-term return
of fixed income (risk-free rate).

4.7. Net present value and recovery period of the project

Calcareos estimated the net present value (NPV) of the economic and financial flows
according to the following methodology:

 Economic net present value: The economic cash flow was discounted at the
WACC rate (12.62%), thus, the economic NPV amounted to US$5,788,471.

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Financial net present value: The financial cash flow was discounted at the
VVACC rate (12.62%), thus, the financial NPV amounted to USS5.788,471.

It should be noted that for calculating the residual value. Calcareos assumed a perpetual
growth of 3.0%.

As for the calculation of the Financial NPV. Deloitte indicates that the COK rate should
be consider discounting flows.

On the other hand, Calcareos estimated a recovery period of seven years considering
the economic flows and 5 years considering the financial flows. In this regard. Deloitte
recommends the calculation of the recovery period on the basis of flows, economic or
financial, brought to present values. through the method of Dynamic Recovery Period.

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5. Conclusions
From the review of the methodology used by Calcareos in determining the profitability of
the project, Deloitte found that:

 Workers participation: Since the analysis of human resources made by the

company indicates that 67 employees would be needed for the project,
distribution of worker participation should be included to obtain net income.
According to Legislative Decree No. 892, the company should distribute 10% of
income before taxes in payments of employee participation.

 Discount rate: Calcareos has calculated the difference between the return on
equities and the return of fixed income. However, the company used the short-
term return of fixed income, when it should have used the long-term return of
fixed income (risk-free rate).

 Application of the Discount Rate for NPV calculation: For the calculation of the
Financial NPV, Calcareos should have considered the COK rate.

 Calculation of Capital Recovery Period: Calcareos used the normal recovery

period, but the dynamic recovery period should be used, since this takes into
account the value of money over time.

Considering the findings described, Deloitte proceeded to make corrections to the

observations made and obtained the results as follows (see Exhibit No, 3):

PROJECT EVALUATION INDICATORS

ECONOMIC FINANCIAL
IRR 14% 25%
VPN US$ 1,770,409 3,879,004
PPB YEARS 7 5
WACC 12.62%
COK 18.04%
ROE 32.30%
ROI 9.69%

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6. Appendix

Appendix 1: Carta de Calcareos del Pacifico S.A.C. a Deloitte Corporate Finance S.A.C.
indicando la información proveida.

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Apéndice 2: certificación de Reservas geologicas for the Concession
Pacific 5 -Code No. 05-00147-003, preparados por Mr. Esteban Quispe
Sanchez

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