CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) of Grupo Mexico, S.A.B. de C.V. (Grupo Mexico) and Southern Copper Corporation (SCC) at 'BBB+' and the FC long-term (LT) IDR of Americas Mining Corporation (AMC) at 'BBB+', all with a Stable Outlook. A full list of ratings follows this release.
KEY RATING DRIVERS:
Strong Group, Focused on Mining in the Americas:
Grupo Mexico's ratings are supported by historically robust credit metrics, as demonstrated by its consolidated rolling average net debt-to-EBITDA ratio of 0.5x and total debt-to-EBITDA ratio of 1.2x for the last five years. Fitch expects the group to generate consolidated EBITDA of around USD3.8 billion in 2014 with an EBITDA margin of 39%, notwithstanding a lower than expected contribution from AMC due to lower copper prices for the year. This is slightly offset by strong performance from the company's transportation and infrastructure divisions.
High Cash Balance; Long-Term Debt Maturities:
Grupo Mexico exhibits strong liquidity with consolidated cash and marketable securities of USD2.2 billion as of Sept. 30, 2014 comfortably covering impending consolidated debt maturities to 2025. Grupo Mexico held no debt at the holdco level as of the same period. The company does not have a dividend payout policy, providing a flexible approach to liquidity during volatile periods and in times of large investments. Fitch's base case scenario indicates net debt-to-EBITDA at around 1x for 2014, peaking at 1.3x in 2015, and deleveraging thereafter. Cash held at the SCC level was USD1 billion as of Sept. 30, 2014, comfortably covering its next debt amortization due in 2015 of USD200 million, and in 2020 of USD400 million.
Mining Division is Grupo Mexico's Major Asset:
AMC is Grupo Mexico's 100%-owned copper mining holding company with mines in Mexico, Peru and the U.S. with exploration projects in Chile, Argentina and Ecuador. AMC benefits from its 83.5% ownership of SCC and 100% ownership of Asarco, located in Arizona. AMC was debt free at the holdco level, and Asarco held USD62 million of net debt related to its acquisition of the minority 25% stake in the Silver Bell mine by Mitsui, taking its ownership in Silver Bell to 100% as of Sept. 30, 2014. The mining division comprises around 76% of Grupo Mexico's consolidated revenues and 76% of EBITDA. Grupo Mexico's and AMC's ratings are linked to those of SCC and follow Fitch's parent-subsidiary linkage criteria which indicate strong legal and operational ties between the companies including centralized treasury and management commonality.
First-Quartile Copper Producer:
SCC's ratings are supported by its position as one of the lowest-cash-cost producers of copper in the world due to its high-grade mining assets in Peru and Mexico, and its strong profitability while historically maintaining a very conservative leverage profile. For the nine months to Sept. 2014, SCC had an industry-leading operating cash cost of USD1.04 per pound of copper production including by-products such as molybdenum, zinc, gold and silver, and USD1.93 per pound excluding by-products. The by-product credit in the 2014 nine-month period was two cents less than in the 2013 period. This was due to lower prices for silver, and lower sales volume of silver and zinc. For comparison, Corporacion Nacional del Cobre de Chile (Codelco: Fitch LT FC IDR 'A+') had a cash cost of production of USD1.58 per pound of copper net of by-products for the same period.
SCC's ratings are supported by its substantial copper reserves of 67.6 million metric tons 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 triple those of the companies with the next highest mine life, Anglo American Plc (AA: LT FC IDR 'BBB'/Negative Outlook) and Codelco, each of which has 34 years' at their respective production levels. Management intends to nearly double production capacity in order to bring reserve life to 59 years, more in-line with the global industry average range of 20-35 years. SCC was ranked as the world's sixth largest copper producer during 2013, compared to its fifth-place ranking in 2012. Projected copper production for 2014 is in the range of 658,000 metric tons with sales of around USD6 billion. Current investments, excluding Tia Maria, will result in the company producing over 1 million metric tons of copper per year from 2017 onwards.
Mexico's Mining Tax Increase:
Mexico's new mining tax and royalty regime has had a negligible impact on the SCC's credit profile. The Mexican Congress enacted tax law changes during December 2013 that became effective on Jan. 1, 2014. The new law established a 7.5% mining royalty on mining companies' taxable EBITDA. Assuming average copper prices of USD3.50 per pound, the estimated net after-tax cost of this royalty was expected to be USD53 million in 2014. There is an additional royalty of 0.5% on the net sales value of gold, silver and platinum, which has a minor impact. The new tax measures increased SCC's effective tax rate to 39% from 34% annually. This tax level remains competitive with other mining jurisdictions such as Australia and Chile.
Cash Flow Resilience:
Fitch's base case for 2014-2017 indicates strong positive free cash flow (FCF) post-2015 as additional copper volumes materialize from the company's production expansion, EBITDA margins above 45%, and robust credit metrics with funds from operations (FFO) adjusted leverage below 2x throughout the expansion period and incorporating the new Mexican mining tax regime. The impact of this tax on SCC is offset by approximately 50% of its production originating from its Peru operations, and the ability to deduct income taxes to be paid in Mexico from the royalty tax amount owed.
SCC's Consistently Low Leverage:
SCC is Grupo Mexico's main contributor to its strong financial profile, with Fitch expecting the company to account for 61% of group revenues and 73% of EBITDA in 2014. SCC's average net debt-to-EBITDA ratio from 2009-2013 was 0.5x, ranking it equivalently beside BHP Billiton Plc/Limited (BHP: LT FC IDR 'A+'; Stable Outlook) for this long-term ratio. Fitch's base case indicates that SCC will continue to exhibit robust credit metrics through its current investment plan at a time of lower prices, with net debt-to-EBITDA remaining below 1.5x from 2014 to 2017. Fitch's base case uses its mid-cycle commodity price assumptions for copper of USD3.08 per pound in 2014, USD2.95 per pound in 2015 and 2016, and a long-term price of USD2.72.
Geographical Asset Diversification:
SCC's credit profile benefits from its geographical diversification with mines located in Mexico and Peru. The company has four main open-pit copper mines with substantial molybdenum and silver by-product content. There also is a fifth open-pit mine planned for Peru, Tia Maria, with completion scheduled for early 2017. SCC has five smaller mines in Mexico producing zinc, with copper and silver as the main by-products. Two of these mines, Taxco and San Martin, have remained on strike since 2007, an unresolved legacy dating from the company's historical disputes with the labor union in question at those mines. The impact of these two small zinc mines' long-term absence from SCC's production is negligible. To dissipate the effect of general labor strikes across its active operations, the company negotiates long-term labor contracts with seven unions in Peru and two in Mexico.
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. SCC's production of 617,068 metric tons of copper in 2013 originated from four large open-pit mines, of which roughly 50% was from two mines in Peru and 50% from two mines in Mexico. SCC's revenues as of nine-months 2014 were composed of 77% copper, 10% molybdenum, 5% silver, 3% zinc, 2% acid and 3% other by-products. Geographically, sales were split 28% Mexico, 18% U.S., 23% South America, 17% Asia, 14% Europe, and 3% other. This allocation provides plenty of upside for the company to increase sales to Asia, especially China, Japan and India.
Spillage Trust Established to Anticipate Charges:
SCC created a trust totaling USD150 million (MXP2 billion) to counter claims arising from the dam accident at the Buenavista mine, with approximately 40,000 cubic meters of copper sulfate solution being spilled into the Bacanuchi River, a tributary of the Sonora River. The accident occurred due to a rockslide that affected the pumping system at the dam, alongside defective construction of a seal on a pipe at the dam intended for the new SX/EW III plant. The clean-up operation has been completed and government authorities announced the water drawn from its wells fit for human consumption. The trust was created with the Mexican government and is intended to compensate the seven communities affected across the 250KM of riverways in question for loss of earnings. To date, USD75 million has been paid, with a further USD37 million anticipated in 2015 with no further payments from the trust expected.
A rating downgrade could occur for one or more of the following reasons: if SCC and Grupo Mexico's net debt to EBITDA increases sharply above 1.5x on a prolonged basis and it begins to exhibit weakening cash flows; if there is a prolonged deterioration in copper fundamentals below historical trends impacting 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; widespread industrial action severely curtailing mining operations.
A greater diversification of SCC's business profile through its production growth of by-products following successful evolution into a top copper producer with over 1 million metric tons a year by 2017, combined with an extended period absent significant contingent liabilities' risk, could lead to a Positive Outlook or ratings upgrade. This includes the assumption of consistently positive FCF through the cycle after capex and dividends. Approximately 80% of SCC's revenues are generated from copper, strongly linking its fortunes to the demand for that single commodity, while Grupo Mexico's transportation and infrastructure subsidiaries currently comprise just 25% of revenues and 14% of EBITDA, approximately, with the remaining majority attributable to its mining assets.
Fitch affirms the following ratings:
--FC LT IDR at 'BBB+'';
--LC LT IDR at 'BBB+''.
Americas Mining Corporation (AMC)
--FC LT IDR at 'BBB+'.
Southern Copper Corporation (SCC)
--FC LT IDR at 'BBB+';
--LC LT IDR at 'BBB+';
--Unsecured debt issuances at 'BBB+'.
The Rating Outlook for all three entities 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