Grupo Mexico Seen Bucking Copper Slump as Analysts Recommend Buy

  • Thirteen of 21 analysts recommend buying Grupo Mexico shares
  • Analysts see 35% growth in Grupo Mexico stock in 12 months

Grupo Mexico SAB is charging ahead into the worst metals market in 15 years, taking advantage of the slump to ramp up growth while competitors cut back and hunker down.

Mexico’s biggest copper producer is leveraging its relatively low debt and strong profit margins to invest more than $4.6 billion expanding some of its mines, making it one of the favorite picks for analysts’ covering the sector this year. Almost two-thirds of 21 analysts surveyed by Bloomberg recommend buying Grupo Mexico’s shares, according to a Bloomberg survey.

That’s a leap of faith for investors who’ve watched copper prices post three straight annual losses, with a fourth loss forecast for 2016 as global production continues to outpace consumption. The metals producer will be resilient this year as its growth and operating margins counteract a six-year low in copper prices, according to analysts at BBVA and Grupo Bursatil Mexicano SA, known as GBM.

“Grupo Mexico is one of the few companies in the mining industry that has growth plans while most peers suffer,” Jean-Baptiste Bruny, a BBVA Research analyst, said in a phone interview from Mexico City. “They continue to invest, and they have relatively low debt levels. They are well-positioned to see share growth when the copper price recovers.”

Grupo Mexico, the second-largest base metals producer in the Americas and a producer of gold, zinc, lead and silver in addition to copper, saw its shares fall about 7 percent so far this year. But the company’s stock is expected to rise 35 percent by the end of this year, according to the average estimate of analysts surveyed by Bloomberg.

Much of that optimism is based on the company’s balance sheet, which is surviving the downturn in relatively strong shape compared to competitors. Grupo Mexico’s profit margin of 15.5 percent is the third-highest among peers, according to data compiled by Bloomberg. 

That profitability allows the company plenty of room to manage its debt, said Rodrigo Garcilazo, an analyst at GBM. Grupo Mexico’s interest coverage ratio -- a measure of how easily a company can pay the interest on its debt -- is 7.8. The higher the better, and that’s twice as good as the industry’s median.

Grupo Mexico’s press office didn’t reply to messages seeking comment.

Expansion Projects

The company’s planned growth projects should add to its profits. The $3.4 billion expansion of its Buenavista del Cobre mine, thought to have the world’s largest copper reserves, will be at full operations this quarter with the best operating margins among regional peers, according to Bloomberg data. The company also has approved a $1.2 billion expansion at its Toquepala mine in Peru, operated by subsidiary Southern Copper Corp., which is expected to increase copper production by 100,000 tons by 2018.

Expansion projects are rare at a time of such uncertainty and with copper prices so depressed, Bruny said. Other large international copper producers, such as Anglo American Plc and Glencore Plc, have resorted to selling assets or reducing employment amid the metals slump.

“We have seen several of the world’s largest copper companies making relatively aggressive personnel and spending cuts,” said Bruny, who recommends buying the stock. “That is not the case for Grupo Mexico. They are in much better shape than many peers in the sector.”

Chinese Demand

More belt tightening is expected for many miners in 2015 as the Chinese economy weakens, casting more doubt on demand. Barclays Plc said Jan. 12 that copper prices will average $4,350 per metric ton this year, down from a previous forecast of $5,625. The market is likely to see a 250,000 metric-ton surplus in 2016, the bank said.

Chile’s state-owned Codelco, the world’s largest copper miner, last week announced plans to cut production costs by another 11 percent to cope with the decline in prices, trimming a further $574 million from its spending.

About 52 percent of Grupo Mexico’s revenue comes from copper, which will make 2016 another difficult year for the company, said Laura Villanueva, an equity analyst at Mexican brokerage Monex Casa de Bolsa SA, who recommends selling the stock.

“It’s a positive sign that the company is continuing with expansions plans and new projects,” Villanueva said in a telephone interview from Mexico City. “But they can’t control the metal prices. Until prices improve, there continues to be the risk that shares fall.”

Some of the pain from the metals market will be eased by the company’s diverse slate of businesses. Grupo Mexico also has transportation and constructions units, providing it some shelter from falling commodity prices, said GBM’s Garcilazo, who recommends a buy on the shares. Its railroad unit, known as Ferromex, continues to provide Grupo Mexico record earnings before interest, debt, interest and amortization, or Ebitda, he said. The unit’s Ebitda increased 3 percent in the third quarter from a year earlier.

“Despite the copper price fall, there are other interesting growth opportunities," Garcilazo said of the company.

— With assistance by Carlos Torres, and Joseph Richter

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