CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+(exp)' rating to Southern Copper Corporation's (SCC) proposed senior unsecured bond, which will have two tranches with maturities of 2025 and 2045, respectively. The bond will be issued directly through SCC and the proceeds will be used for general corporate purposes including financing the company's multi-year investment program to produce over 1.2 million tonnes of copper by 2018. A full list of the company's ratings follows this release.
KEY RATING DRIVERS
Lowest-Cost Producer of Copper:
SCC ratings are supported by its position as one of the lowest cash cost producers of copper in the world, its strong profitability while maintaining a conservative leverage profile, and geographically diversified mining assets in Mexico and Peru. The company's cash cost of copper production net of by-products for 2014 was USD1.05 per pound and USD1.89 per pound excluding by-products. This cash position compares well with all of SCC's peers, many of which do not benefit from similar high levels of by-product credits. During 2014, copper contributed 78% of revenues, followed by molybdenum (8.8%), silver (4.7%), zinc (3.6%) and other by-products (4.9%). The company's low cost position allows it to generate strong profits during periods of low copper prices.
Conservative Leverage Through-the-Cycle:
SCC's ratings are also supported by its conservative debt profile and strong capital structure as demonstrated by its average net debt-to-EBITDA ratio for the last five years of 0.7x. The company's net debt to EBITDA ratio increased to a still manageable 1.4x in 2014 from 0.9x in 2013. This was mainly due to lower cash and marketable securities of USD601 million in 2014 compared to USD1.7 billion in 2013 with gross debt levels similar at around USD4.2 billion at both year-ends. EBITDA in 2014 was USD2.7 billion compared to USD2.9 billion in 2013. Average LME copper prices were lower at USD3.11 per pound in 2014 compared to USD3.32 per pound in 2013, with the price reduction mostly offset by higher copper production of 676,599 tonnes compared to 617,019 tonnes during the prior year.
Ambitious Investment Plan:
SCC is continuing with its large capital expenditure program to increase annual copper production to almost 1.2 million tonnes by 2018 which will rank it within the top 3 copper producers globally when finalized. This target will be achieved through Brownfield expansions and currently excludes the company's delayed Tia Maria Greenfield project in Peru with expected annual production of 120,000 tonnes of copper cathodes. This project has been repeatedly delayed. The company and Peruvian government aim to resolve final differences with local communities in order to allow investments to proceed by the end of 2015. SCC's Board of Directors approved capex of approximately USD2.7 billion for 2015, a significant increase on USD1.5 billion spent in 2014 that came in lower than budget due to the expansion delays experienced at the Buenavista mine in Mexico and Toquepala mine in Peru. This investment includes the construction of the new SXEW III plant, a new molybdenum plant, and a new concentrator along with related infrastructure and other systems.
SCC's credit profile benefits from its substantial copper reserves of 67.6 million tonnes of contained copper that equates to over 105 years in mine life at current production rates. This position ranks SCC at number one among globally listed companies, and it boasts approximately triple the reserves of those companies with the next highest mine lives: Anglo American Plc (AA: Fitch LT FC IDR 'BBB'/Negative Outlook) and Codelco (LT FC IDR 'A+'/Stable Outlook). The company currently operates four main open-pit copper mines with substantial molybdenum and silver by-product content. SCC has five smaller mines in Mexico producing zinc, with copper and silver as the main by-products. To dissipate the effect of general labor strikes, the company negotiates long-term labor contracts with seven unions in Peru and two in Mexico.
Cash Flow Pressure Expected due to High Capex:
SCC's ratings incorporate the expectation of negative free cash flow (FCF) through its large investment cycle with Fitch expecting to see significant FCF generation post-2016. The company's cash position eroded to USD402 million in 2014 from USD1.7 billion in 2013 as the company generated funds from operations (FFO) of USD1.4 billion to fund working capital of USD21 million, capex of USD1.5 billion and dividend payments of USD381 million, resulting in FCF of negative USD556 million. In addition, SCC repurchased USD683 million of its equity during 2014 as part of the company's ongoing share buyback program. This compares to FFO of USD1.9 billion to fund working capital of USD71 million, capex of USD1.7 billion, dividends of USD574 million resulting in FCF of negative USD420 million in 2013. Share repurchases amounted to USD281 million in 2013.
Lower Copper Prices Offset by Higher Volumes:
SCC's revenues and EBITDA experienced a relatively modest decrease due to lower metal prices in 2014 to USD5.8 billion and USD2.7 billion, respectively, compared to USD5.9 billion and USD2.9 billion in 2013. Higher metal sales volumes offset the price decrease to a significant extent. The company's 2014 EBITDA margin of 49%, a decline on 56% in 2013, remains amongst the highest of Fitch-rated peers in the copper mining sector. Fitch's Base Case uses the agency's mid-cycle commodity price assumptions for copper of USD2.95 per pound in 2015 and 2016 with a long-term price of USD2.72 per pound. Fitch expects SCC's net debt-to-EBITDA ratio to fall around 1.5x for this year and to around 1x in 2016 based on SCC's production ramp-up.
Fitch's key assumptions within the rating case include:
--Increasing copper sales volumes year-on-year as per company guidance;
--Fitch's mid-cycle commodity price assumptions;
--Higher average corporation taxes following Mexican tax reform
--Capex in line with guidance;
--Dividends around 30% of net income;
--Net debt relatively stable as the company increases in size.
A negative rating action could take place due to one or a combination of the following factors:
--If SCC's net debt-to-EBITDA increases above 1.5x on a sustained basis and it exhibits fundamentally weakening cash flows and liquidity;
--If there is a prolonged deterioration in copper fundamentals below historical trends permanently affecting its capital structure;
--If management's approach to dividends and/or acquisitions becomes aggressive without sufficient regard to cash flows and debt ratios.
The following could lead to a positive rating action:
--Greater diversification of SCC's operational profile by commodity and number of mines, a significant growth in scale, consistently strong FCF generation and net debt-to-EBITDA consistently below 1x, combined with an extended period without significant contingent liabilities' risk.
Fitch rates SCC as follows:
Southern Copper Corporation (SCC)
--FC LT IDR at 'BBB+';
--LC LT IDR at 'BBB+';
--Unsecured debt issuances at 'BBB+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May. 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage