Fitch Upgrades IDRs of Grupo Mexico, SCC and AMC to 'BBB+'
CHICAGO & MONTERREY, Mexico -- December 03, 2012
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:
--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
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[cl]';
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
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.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug 12, 2012);
--'National Ratings Criteria' (Jan. 19, 2011);
--'Evaluating Corporate Governance' (Dec. 13, 2011);
--'Country Ceilings'(Aug. 12, 2012).
Applicable Criteria and Related Research:
Evaluating Corporate Governance
National Ratings Criteria
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Jay Djemal, +1-312-368-3134
70 West Madison Street
Chicago, IL 60602 USA
Joe Bormann, CFA, +1-312-368-3349
Alberto Moreno, +52 81 8399-9100
Peter Shaw, +1-212-480-4417
Elizabeth Fogerty, +1-212-908-0526
Press spacebar to pause and continue. Press esc to stop.