CHICAGO & NEW YORK--(BUSINESS WIRE)--Copper mining companies in Latin America are well positioned within the global cost curve to withstand a period of lower copper prices that are currently around $2.40/lb, according to Fitch Ratings.
Copper prices declined from around $3.10/lb on average during 2014. The price decline represents a relatively modest copper surplus of around 200,000 tonnes of copper per year expected through 2016 within a total market of around 21 million tonnes of copper annually. Fitch's midcycle price assumption for copper during 2015 and 2016 is $2.72/lb, rising to $2.95/lb in 2017 and beyond, reflecting the expectation of a return to a copper deficit.
We believe the low cost position of copper miners in Latin America ensures they are well placed to remain profitable during the next two years while they continue their production expansions. These companies are expected to reap the benefits when prices begin to reflect a dearth in supply supported by their streamlined cost structures, higher low cost volumes and healthy mineral reserves. The current lower copper price is exacerbated by a strengthening of the U.S. dollar and China's housing market slowdown. The average copper price during the first half of 2015 was around $2.70/lb. Prices at these levels do not provide strong incentive for future supply growth, further highlighting long-term fundamentals for the red metal.
Fitch's long-term midcycle price assumption for copper of $2.72/lb is significantly higher than the average cash cost of production for the Latin American copper miners. Southern Copper Corporation (SCC, 'BBB+'/Stable), one of the lowest cost producers of copper globally, exhibited a cash cost of production of around $1.05/lb, including byproducts during the first half of 2015. This cost of production reflects SCC's position in the first quartile of the cost curve supported by its high-grade mining assets in Peru and Mexico and its strong profitability while historically maintaining a very conservative leverage profile.
SCC has been investing around $1.7 billion annually since 2013 to increase production to over 1.2 million tonnes of copper annually by 2017, with total capex expected to peak at about $2 billion in 2015. By more than doubling its production from 2014 levels, SCC ensures robust future cash flow generation even during a period of lower copper prices due to its low cost position. The company's low-cost position is aided by significant byproducts, such as molybdenum, zinc, gold and silver. Fitch's base case expectation for SCC's EBITDA in 2015 is around $2.3 billion with a net/debt EBITDA ratio of around 1.7x, exhibiting the company's resilience as it continues its expansion plans amid a lower metal price environment. The company's net leverage ratio is expected to decrease to around 1.3x in 2016 and fall further to below 1.0x in 2017, as projected copper volumes increase to over 910,000 tonnes in 2016 and over 1 million tonnes in 2017 from close to 760,000 tonnes in 2015.
Corporacion Nacional del Cobre de Chile (Codelco, 'A+'/Stable), the largest copper mining company in the world with annual production of around 1.8 million tonnes (including output from its proportional shares in El Abra and Anglo American Sur), exhibited a cash cost of $1.36/lb, including byproducts in 1Q15, providing headroom against low copper prices as a producer in the second-quartile of the global cost curve. The company is targeting a return to the first quartile of production cost once it successfully executes its current investment plan, with targeted completion in 2022. Copper represents over half of Chile's exports, resulting in a strong correlation between the price of copper and the strength of the Chilean peso. This benefits miners' cost structures in Chile; when copper prices have decreased historically, the Chilean peso has decreased in line accordingly, acting as a natural hedge for copper miners in the country.
Codelco is expected to reflect a continued weakening in its credit profile as a result of higher debt levels used to finance its large capex program of around $4 billion annually. Fitch's base case for Codelco projects EBITDA of close to $4.2 billion, corresponding to a net debt/EBITDA ratio of around 3.5x in 2015. This ratio is expected to climb to about 3.8x in 2016 as the company continues its capex financing strategy through a combination of retained earnings, cash flow, a capital injection and additional debt, while volumes remain relatively stable at current levels until post-2020. These ratios include Codelco's nonrecourse debt with Mitsui. Codelco's ratings reflect its 100% ownership by the government of Chile and its strategic importance to the country, representing 14% of total government revenues and 10% of world copper production.
Copper projects have historically underdelivered to their completion time frames. Environmental licensing, labor unrest, expense of securing energy and water for new projects, and resistance from local communities all play a part in slowing down the execution of announced projects, as seen recently with SCC's stalled Tia Maria Greenfield project. Declining ore grades are also an issue for the entire industry, with a significant proportion of new copper volumes announced offsetting lower output from major players such as Codelco, with this particular company investing around $4 billion per year to maintain copper production at current levels. Mines are also exposed to unforeseen shocks that could impact supply levels.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.