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
--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
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
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
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.