CHICAGO & MONTERREY, Mexico--(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+'. Fitch has also affirmed the FC and LC IDRs of Grupo Ferroviario Mexicano (GFM) at 'BBB+' and the national scale and debt ratings of Ferrocarril Mexicano S.A. de C.V. (Ferromex) at 'AAA(mex)'. The Rating Outlook is Stable.
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 0.8x and total debt-to-EBITDA ratio of 1.5x for the last five years. Fitch expects the group to generate consolidated EBITDA of around USD3.3 billion in 2015 with an EBITDA margin of 38%, 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.
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 87.5% ownership of SCC and 100% ownership of Asarco, located in Arizona. AMC was debt free at the holdco level, and Asarco held USD33 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 comprised around 75% of Grupo Mexico's consolidated revenues and 77% of EBITDA in 2014. 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 September 2015, SCC had an industry-leading operating cash cost of USD1.06 per pound of copper production including by-products such as molybdenum, zinc, gold and silver, and USD1.64 per pound excluding by-products, placing it in the first quartile of the industry cost curve. For comparison, Corporacion Nacional del Cobre de Chile (Codelco; LT FC IDR 'A+') had a cash cost of production of USD1.40 per pound of copper net of by-products for the same period.
SCC's ratings are supported by its substantial copper reserves of 69.9 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, significantly higher than those of the companies with the next highest mine life, Codelco (56.7 years) and Freeport MacMoran (36.6 years). 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 fifth largest copper producer during 2014. Projected copper production for 2015 is in the range of 738,000 metric tons with sales of around USD5 billion. Current investments, excluding Tia Maria, will result in the company producing over 1 million metric tons of copper per year from 2017 onwards.
Cash Flow Resilience:
Fitch's base case for SCC during 2015-2018 indicates strong positive free cash flow (FCF) post-2016 as additional copper volumes materialize from the company's production expansion, EBITDA margins above 50%, and robust credit metrics with net adjusted leverage below 2.5x throughout the expansion period and incorporating the Mexican mining tax regime introduced in 2014. 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 59% of group revenues and 67% of EBITDA in 2015. SCC's average net debt-to-EBITDA ratio from 2011-2014 was 0.8x, ranking it equivalently beside BHP Billiton Plc/Limited (BHP; LT FC IDR 'A+'/ Outlook Stable) 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 2.3x from 2015 to 2016, declining to around 1.5x in 2017 and back below 1.0x thereafter. Fitch's base case uses its mid-cycle commodity price assumptions for copper of USD2.50 per pound in 2016, USD2.72 per pound in 2017 and 2018, and a long-term price of USD2.95 per pound.
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 2018. 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 657,000 metric tons of copper in 2014 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 2015 were composed of 79% copper, 5% molybdenum, 5% silver, 4% zinc, 7% other by-products; geographically, sales were 35% Mexico, 15% U.S., 17% South America, 22% Asia, 11% Europe, and 2% other. This allocation provides plenty of upside for the company to increase sales to Asia, especially China and India.
Railroad Division's Strong Credit Linkage to Group:
The rating affirmations for GFM and Ferromex follow the affirmation of Grupo Mexico's IDRs at 'BBB+' with a Stable Outlook. Ferromex's ratings are supported by the strong legal and operational ties with its parent, GFM, which owns 100% of Ferromex. GFM is in turn owned 74% by Infrestructura y Transportes (ITM) and 26% by Union Pacific. FM Rail Holding is 75% owned by Grupo Mexico. FM Rail Holding is also the parent company for Infraestructura y Transportes Ferroviarios (ITF), which in turn owns 100% of Ferrosur, and 100% of Texas Pacifico Transportation Ltd (Texas Pacifico) in West Texas, U.S. The rating linkages follow Fitch's parent and subsidiary criteria.
Leading Railroad Position in Mexico:
The ratings are also supported by the company's leading position within the Mexican railroad transportation sector with a 55% market share of railway load distribution (calculated by million tons-km), increasing to 66% market share for FM Rail Holding when taken as a whole. This compares to the next largest domestic competitor, Kansas City Southern de Mexico S.A. de C.V. (KCSM; LT IDR 'BBB-'/Outlook Positive) with a 31% market share, with other regional lines comprising the other 2%. Railroad transportation penetration in Mexico is low and has significant potential for future growth, with trucks accounting for 75% of transportation and rail only accounting for 25% in 2014.
Ferromex's Strong Standalone Credit Metrics:
Ferromex has a strong standalone credit profile. For the latest 12 months (LTM) to Sept. 30, 2015, the company generated MXP10 billion of EBITDAR with an EBITDAR margin of 43%, compared to MXP7 billion and 34% for the same period in 2014, respectively. Fitch's base case indicates EBITDAR in the region of MXP10.4 billion with an EBITDAR margin of 41% in 2015. The year-over-year improvement was due to continued focus on operational efficiencies, improved product mix leaning toward lighter commodities and lower diesel costs. These were achieved by using longer trains and more fuel-efficient locomotives, with the rollout still ongoing. Longer trains helped to reduce the total number of trains required to be operated during the period, thus reducing costs. The higher cargo volumes carried by the longer trains also improved the company's profit margins.
GFM's Robust Cash Flow Generation Through-the-Cycle:
GFM has exhibited strong cash flows since 2008, with positive free cash flow (FCF) every year except 2011, when it recorded negative FCF of USD139 million as a result of capex of USD284 million to improve efficiency and dividends of USD100 million, and 2013, when FCF was negative USD112 million after elevated capex of USD360 million and a higher dividend payment of USD100 million. Capex for GFM is expected in the region of USD350 million in 2015 rising to USD430 million in 2016, and dividends are expected to be around USD100 million.
Grupo Mexico's Strategic Assets in Railroad Transportation:
FM Rail Holding possesses Mexico's largest railroad with a track network of 10,570km, covering approximately 81% of Mexico's territory. The company connects with five gateways across the Mexico-U.S. border and has access to four seaports on the Pacific Ocean and two seaports on the Gulf of Mexico. Together, Ferromex and Ferrosur, via FM Rail Holding, have a combined market share of 66% in the Mexican railroad transport sector. Texas Pacifico has 616km of track network that runs from the Mexican-U.S. border Ojinaga-Presido to San Angelo Junction, and provides a key strategic cross-border presence to Grupo Mexico's comprehensive railroad transportation network.
Fitch's key assumptions within the rating case for SCC and Grupo Mexico include:
--Average copper price of USD2.57/lb in 2015 and Fitch's mid cycle copper price assumptions of USD2.50/lb in 2016, USD2.72/lb in 2017 and USD2.95/lb in 2018 and beyond;
--Production volume at 738 thousand metric tons in 2015; 897 thousand metric tons in 2016; 1 million metric tons in 2016 and 1.2 million metric tons in 2018 and beyond;
--Average Mexican Peso exchange rate at around MXP/USD 16.8 in 2015 and MXP/USD 16.0 in 2016 and beyond;
--Average Peruvian Nuevo Sol exchange rate at around PEN/USD 3.4 in 2015 and PEN/USD 3.5 in 2016 and beyond;
--Capex of USD 1.3 billion in 2015, USD2.3 billion in 2016 and USD1.1 billion in 2017 and USD600 million in 2018.
Fitch's key assumptions within the rating case for GFM, Ferromex and Grupo Mexico include:
--Revenues based on 43,500 tons kilometre (TKM) in 2015, 45,800 TKM in 2016 and above 47,400 in 2017;
--Revenue per TKM of MXP562 in 2015, MXP612 in 2016 and MXP629 in 2017;
--Higher operating leases.
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 outside of significant investment periods on a sustained basis and SCC begins to exhibit weakening cash flows impacting the credit profile of Grupo Mexico; if there is a prolonged deterioration in SCC's low production cost position and/or copper fundamentals deteriorate 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 Grupo Mexico's business profile through its production growth of by-products following successful evolution into a top three copper producer with over 1 million metric tons a year by 2017, combined with an extended period absent of significant contingent liabilities' risk, further combined with the railroad division increasing its contribution to Grupo Mexico to account for over 25% of EBITDA alongside a growing infrastructure division significantly diluting the mining contribution, could lead to a positive outlook or ratings upgrade. Grupo Mexico's transportation and infrastructure subsidiaries currently comprise just 20% of revenues and 10% of EBITDA, approximately. Approximately 80% of SCC's revenues are generated from copper, strongly linking its fortunes to the demand of that single commodity.
GFM and Ferromex's ratings are tied to those of their ultimate controlling shareholder, Grupo Mexico. Future rating actions will continue to mirror those taken on Grupo Mexico and its other subsidiaries.
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, 2015, comfortably covering impending consolidated debt maturities to 2025. Grupo Mexico held no debt at the holdco level as of the same period. Fitch's base case scenario indicates net debt-to-EBITDA at around 1.5x for 2015, peaking at 1.7x in 2016, and deleveraging thereafter. Cash held at the SCC level was USD1.4 billion as of Sept. 30, 2015, comfortably covering its next most significant debt amortization due in 2020 of USD400 million.
GFM has low refinancing risk with USD126 million of cash and marketable securities as of Sept. 30, 2015 compared to short-term debt of USD8 million, corresponding to a cash-to-short-term debt coverage ratio of 16x. The company benefits from its majority ownership by Grupo Mexico, which reported consolidated cash and marketable securities of over USD2.2 billion as of Sept. 30, 2015. Fitch would expect Grupo Mexico to provide GFM with liquidity assistance in the form of lower dividends, capex requirements, or other tangible resources, in the event that it is required.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Grupo Mexico S.A.B. de C.V.
--Foreign currency long-term IDR at 'BBB+';
--Local currency long-term IDR at 'BBB+'.
Americas Mining Corporation
--Foreign currency long-term IDR at 'BBB+'.
Southern Copper Corporation
--Foreign currency long-term IDR at 'BBB+';
--Local currency long-term IDR at 'BBB+';
--Unsecured debt issuances at 'BBB+'.
Grupo Ferroviario Mexicano, S.A. de C.V.:
--Foreign currency long-term IDR at 'BBB+';
--Local currency long-term IDR at 'BBB+';
Ferrocarril Mexicano, S.A. de C.V.
--National long-term rating at 'AAA(mex)';
--Senior unsecured debt issuances at 'AAA(mex)'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Nov. 20, 2015.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Dodd-Frank Rating Information Disclosure Form