Volcan Erupts in Peru.

Family-owned zinc miner joins the big boys.

THE DOOMSAYERS CAME OUT IN force when Peru's Volcan Mining Company went after the government's Paragsha zinc mining operation.

It was May 1999, just two years after Volcan successfully took over another government zinc mine, Mahr Tunel. Still, analysts at home and abroad questioned the logic behind the purchase of troubled Paragsha, which experts predicted would be mined out in just five years.

Volcan and Mahr Tunel had a long history of working together, so it seemed only natural when Volcan's US$128 million bid beat out other suitors. With the acquisition, Volcan's zinc production shot up overnight, from 60,000 tons to 163,000 tons, The company, founded in 1943, had begun its transformation from an obscure family-owned producer to one of Peru's leading zinc miners.

But Paragsha, also known as the Cerro de Pasco mine for the city that grew around it, was far different from Mahr Tunel. Environmental problems and disputes with the local community plagued the mine. The size of the deposits at the open-pit operation were disputed, and the $60 million starting price scared off international companies, such as Switzerland's Glencore and Canada's Cominco. Even U.S.-based Doe Run, which had recently purchased the nearby La Oroya refinery, steered clear.

When Paragsha hit the auction block, Volcan was the lone bidder.

"Many of the other companies were afraid of the potential social unrest and the price of zinc was also low at the bidding time. We decided to take the risk, and it has paid off for us," says Volcan General Manager Jose de Bernardis.

Pay dirt. With Paragsha and several smaller acquisitions that followed, Volcan now ranks as the world's No. 4 zinc miner, closing 2000 with production of about 575,000 tons. Its net earnings for the first nine months of 2000 were nearly $25 million, a 444% increase over the same period a year earlier.

Zinc production rose 143% in the first three quarters of 2000, but lead and copper yields have also risen. And Volcan's silver output is up 75%. (Peru is now the world's second biggest silver producer, slightly trailing Mexico.)

Better international prices for zinc have also helped Volcan plow ahead. The value of a metric ton rose more than 9% in the first three-quarters of 2000, reaching $1,177. Copper prices, meanwhile, jumped nearly 20% during the same period, although lead fell close to 12% per metric ton and silver dropped 3.5%.

Prospecting for new veins of all heavy metals is adding millions of tons to Peru's recorded reserves and, presumably, more years to Volcan's life. De Bernardis predicts domestic zinc production will reach 713,500 tons and silver 22 million ounces by the end of 2002.

"The reserves are open-ended. We are drilling deep and wide and we have yet to find any indication of the end," says British mining consultant Martin Moult, citing Volcan as one of the most impressive companies with which he has worked. "There's great potential here to vastly increase profit."

Volcan took a big step in November 2000 when it became the first Peruvian company traded on Spain's Latibex. "This is important to the company, because it reflects our work and our desire to be a major player in the mineral market," De Bernardis says.

Volcan now has 2,500 employees on its payroll and spiffed-up headquarters, but the company remains focused. "Our goal is to be a world-class zinc producer, and we are achieving that goal. Anything other than producing zinc, even the other metals, is secondary to us," De Bernardis says.