Billionaire Is Loser in Bond Market as Copper Giant Burns Cash

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Mexico billionaire German Larrea isn’t inspiring much confidence in the bond market these days.

Southern Copper Corp., the copper behemoth controlled by Larrea, has seen its bonds tumble 4.6 percent since they were sold in April as prices for the metal plunge and the company burns through cash. The decline is more than 10 times the average loss in emerging markets.

Eight days after the $2 billion bond offering, Southern Copper, which boasts the world’s largest proven copper reserves, said its cash hoard shrank 36 percent in the first quarter from a year earlier as it bought back shares and paid dividends. That’s not sitting well with debt investors as copper tumbles 11 percent this year, touching a six-year low last week as demand from China wanes.

“For creditors, especially for bondholders, it’s not the best thing,” Omar Zeolla, an analyst at Oppenheimer & Co., said of the company’s use of cash.

Southern Copper didn’t immediately respond to requests for comment on its bond performance and cash position.

The company, 84 percent owned by Larrea’s Grupo Mexico SAB de CV, saw its cash tumble to a two-year low of $221.5 million in the first quarter after spending a record $370 million repurchasing shares.

Bond Proceeds

Yields on the $500 million of notes issued by Southern Copper on April 20 have climbed 0.4 percentage point to 4.3 percent, data compiled by Bloomberg show. The company will use the bond proceeds, along with those from an additional $1.5 billion of 30-year notes issued at the time, to help finance expansion as it seeks to boost output.

Paul Lukaszewski, a money manager at Aberdeen Asset Management Plc, said the slump in Southern Copper’s bonds is excessive.

“Southern Copper bonds have come under pressure recently due to the global selloff in many commodities including copper,” he said by e-mail from London. “The company, which is among the lowest-cost copper producers in the world, has a very strong balance sheet and has many levers it can pull to protect that balance sheet, including slowing its capital expenditures and reducing share buybacks and dividends.”

Mexico’s peso fell 0.5 percent Friday to 15.9077 per dollar as of 2:31 p.m. in New York.

Southern Copper, which gets 55 percent of its revenue from Mexico, last cut its dividend in January.

To Bloomberg Intelligence analyst Richard Bourke, Southern Copper is spending its cash too aggressively.

Capital expenses, share buybacks and dividends exceeded cash from operations in the first quarter by $475 million.

“They could be a lot more conservative by slowing down their cash outflows,” Bourke said by telephone from New York.