TEXT - Fitch raises Grupo Mexico S.A. de C.V.
Dec 3 - Fitch Ratings has upgraded the Foreign Currency and Local Currency Issuer Default Ratings (IDRs) of Grupo Mexico, S.A. de C.V. (Grupo Mexico), Southern Copper Corporation (SCC) and Americas Mining Corporation (AMC), as follows: Grupo Mexico --Foreign currency long-term IDR to 'BBB+' from 'BBB'; --Local currency long-term IDR to 'BBB+' from 'BBB'. Americas Mining Corporation (AMC) --Foreign currency long-term IDR to 'BBB+' from 'BBB'. Southern Copper Corporation (SCC) --Foreign currency long-term IDR to 'BBB+' from 'BBB'; --Local currency long-term IDR to 'BBB+' from 'BBB'; --Unsecured debt issuances to 'BBB+' from 'BBB'. The Rating Outlook for all three entities is Stable. Grupo Mexico's ratings have been upgraded following a prolonged period of strong financial and operational performance by its key subsidiaries in the mining and transportation sectors. The stable fundamentals for the copper industry, as well as Grupo Mexico's solid growth prospects, support this upgrade. The company's strong growth trajectory is in contrast to some of its peers in the mining industry that are spending large sums of money to maintain current copper output levels due to declining ore grades. The ratings also take into consideration the conservative leverage at the Grupo Mexico level and across its subsidiaries, in addition to their leading market positions. Grupo Mexico's ratings were assigned using Fitch's parent and subsidiary rating linkage criteria. These rating actions follow the resolution of a number of issues that have weighed on the group's credit quality over the past decade. These include a prolonged strike at SCC's Buenavista (Cananea) mine, numerous issues and litigation related to Asarco and the corporate restructuring of subsidiaries, as well as anti-trust proceedings in the company's railroad division. Grupo Mexico has averaged a consolidated net debt-to-EBITDA ratio of 0.2x and total debt to EBITDA ratio of 0.8x for the last five years on a rolling average basis. For the LTM to Sept. 30, 2012, the company generated EBITDA of USD4.7 billion and an EBITDA margin of 45.9%, with positive free cash flow of USD262 million after capex and dividends. The company's total debt and net debt-to-EBITDA ratios for the LTM were 0.8x and 0.2x, respectively, and its funds from operations adjusted leverage was 1.1x. SCC is Grupo Mexico's main contributor to its strong financial profile, accounting for 79% of revenues and 84% of EBITDA in 2011. SCC is one of the lowest cash cost producers of copper in the world and has exhibited strong profitability while maintaining a very conservative leverage profile over the last five years. Under Fitch's base case scenario, SCC's cash flows before dividends and capital structure are resilient to significantly lower prices for its main products due to its low operating cash cost position. Using Fitch's mid-cycle price for copper of USD2.72 per lb in 2013 and 2014 based on production volumes below market guidance, the company exhibits total debt-to-EBITDA ratios of 1.4x while net debt-to-EBITDA remains below 1.0x for both years in question. Due to a favorable debt maturity profile with an average debt life of 22.1 years, SCC has extremely strong liquidity. SCC's cash cost per lb of copper for the first nine months of 2012 was USD0.65 per lb net of by-products, and USD1.77 per lb excluding by-products. While this marks an increase from USD0.45 per lb net of by-products for the first nine months of 2011, the company still retains its first-quartile operating cash cost position. For comparison, Codelco (Fitch IDR of 'A+') had a cash cost of production of USD1.48 per lb of copper net of by-products for the first six months of 2012 and has been a second-quartile cost producer since 2008. Issues affecting the sector include declining ore grades and increased operating costs, namely labor, materials and energy. While SCC has experienced the same increase in operating costs, it has not been faced with declining ore grades, benefiting from average copper ore grade of between 0.6% and 0.65% at its open-pit mines. The rating upgrade is also supported by SCC's geographical diversification with mining assets located across Mexico and Peru. The company has four main open-pit copper mines with substantial molybdenum and silver by-product content, with a fifth open-pit mine planned in Tia Maria, Peru. The company also has five smaller mines in Mexico and one in Peru predominantly producing zinc, with copper and silver as their main by-products. The company negotiates long-term labor contracts with eight unions in Peru, and two in Mexico. This relatively large number of unions dissipates the risk of complete production stoppages due to labor strikes, as seen during the Cananea dispute. Further supporting SCC's ratings are its leading worldwide position of copper reserves at 58.8 million tons of contained copper that equates to 100 years in mine life at 2011 production rates. This position ranks SCC at no.1 among globally listed companies. SCC's copper production of 587,000 metric tons in 2011 ranked it as the world's sixth largest copper mining company. SCC's average net debt-to-EBITDA ratio for the last five years was just 0.2x (LTM Sept. 30, 2012 0.5x), ranking it equivalently beside BHP Billiton (Fitch IDR of 'A+'; Stable Outlook) and Escondida (National Rating of 'AAA '; Stable Outlook) for this ratio over the same period. With London Metal Exchange LME 12-month average copper prices to Nov. 26, 2012 currently at around USD3.59 per lb, a decline from USD4.01 in 2011, the company was able to maintain its conservative leverage ratios. SCC held total debt of USD2.7 billion as of Sept. 30, 2012, unchanged from year-end 2011 and 2010. SCC's liquidity position is strong with cash and marketable securities of USD1.2 billion as of Sept. 30, 2012. This amount excludes the USD2.1 billion damage award receivable received from AMC to satisfy the terms of the Delaware Ruling. SCC's board authorized a cash dividend of USD2.75 per share that was paid on Nov. 21, 2012. As a result of this dividend, AMC will receive USD1.9 billion back in cash. SCC's comfortable liquidity position benefits from its long-term amortization profile with just USD10 million due in 2013 and USD200 million in 2015. The next major amortization of USD400 million is not due until 2020. The company's liquidity ratios are subsequently extremely strong for the current period, with a cash-to-short term ratio of 15.8x. SCC's projected copper production for 2012 is in the range of 640,000 metric tons. Current investments, excluding Tia Maria, will result in the company producing over 1 million metric tons of copper per year from 2015 onwards which will place it among the top four global copper miners. SCC was the second largest global molybdenum producer as of Sept. 30, 2012, with 42.2 million lbs of molybdenum produced for the nine months, ranking behind Freeport with 84.3 million lbs and just ahead of Codelco with 41.9 million lbs for the same period. The company's current brownfield investments will grow its copper production to around 680,000-690,000 thousands metric tons in 2013, over 700,000 metric tons by 2014 and over 1 million metric tons by 2015. This relatively fast trajectory to becoming a major global producer of copper excludes greenfield projects such as Tia Maria, which are expected to contribute to copper production output from 2015 onwards. SCC's LTM EBITDA margin as of Sept. 30, 2012 was 52.3%, the highest amongst rated peers in Fitch's Latin American copper mining sector, and second after Vale (IDR: 'BBB+'; Stable Outlook) when including the entire mining sector. Funds from Operations were USD2.3 billion for the LTM period compared to USD2.6 billion in 2011 and USD1.9 billion in 2010. SCC's LTM FCF for the same period improved to negative USD81 million compared to negative FCF of USD600 million in 2011. Fitch expects FCF to further improve by year-end 2012. SCC's FFO fixed-charge coverage ratio was strong for the period at 13.4x. SCC's revenue generation allocation provides plenty of upside for the company to increase sales to Asia, especially China, Japan and India. The company's revenue-split by market for the first 9 months to Sept. 30, 2012 was: US 32%, Europe 18%, Mexico 19%, Asia (incl. China) 9%, Brazil 9%, Chile 8%, Peru 4% and other Latin America 1%. SCC's revnue split by product for same period was comprised as follows: copper 77%, molybdenum 7%, silver 7%, zinc 3%, sulfuric acid 3% and other (incl. gold) 3%. AMC, through its ownership of SCC and Asarco, comprised 83% of Grupo Mexico's consolidated revenues and 90% of EBITDA in 2011. The rating upgrade of AMC follows Fitch's parent-subsidiary linkage criteria, which indicates strong legal and operational ties between AMC and SCC, limited cross-defaults between SCC and AMC existing for AMC's bank debt, and centralized treasury and management commonality. AMC is Grupo Mexico's 100%-owned copper mining holding company with mines in Mexico, Peru and the U.S. with exploration projects underway in Chile, Argentina and Ecuador. The company benefits from its 81.3% ownership of SCC and 100% ownership of Asarco, located in Arizona. Together, these companies are expected to generate over 800,000 metric tons of copper for AMC in 2012. Asarco possesses three main mines in Arizona: Ray, Mission and Silver Bell, with a smelter in Hayden, Arizona and a refinery in Amarillo, Texas (second largest refinery in the world). The Amarillo refinery is close to AMC's operations in Mexico through SCC, providing opportunities for operational synergies. Asarco's revenues and EBITDA in 2011 were USD1.9 billion and USD872 million, respectively, up from USD1.7 billion and USD732 million, respectively, in 2010. Fitch forecasts that Asarco will generate revenues and EBITDA of around USD1.5-USD2 billion and USD600 million-USD650 million, respectively, in 2012 on copper production of approximately 200,000 metric tons. The company's ore grades are above the U.S. average of 0.36% with 0.53% at Mission, 0.43% at Ray and 0.40% at Silver Bell. As of Sept. 12, 2012, Asarco had no debt. The possibility of future rating upgrades is limited due to SCC's single commodity exposure and its position as the main contributor to Grupo Mexico's credit strength. Approximately 80% of SCC's revenues are generated from copper, strongly linking its fortunes to the demand of that single commodity, while Grupo Mexico's transportation and infrastructure subsidiaries currently comprise just 20% of revenues and 10% of EBITDA, approximately. While copper fundamentals remain sound for the foreseeable future, further upside to the ratings would require SCC to significantly diversify its revenue stream. A rating downgrade could occur for one or more of the following reasons: if the company's net debt-to-EBITDA increases sharply above 1.5x and it begins to exhibit weakening cash flows; if there is a prolonged deterioration in copper fundamentals below historical trends affecting the company's capital structure; if management's approach to dividends and/or acquisitions becomes more aggressive without sufficient regard to cash flows and debt ratios; and widespread industrial action severely curtailing mining operations.