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+', 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 0.2x and total debt-to-EBITDA ratio of 0.8x for the last five years. Fitch expects the group to generate consolidated EBITDA of around USD4.2 billion in 2013 with an EBITDA margin of 44%, notwithstanding a lower contribution from SCC due to a combination of lower copper prices and volumes for the year. This is slightly offset by strong performance from the company's transportation and infrastructure divisions, alongside stable performance at Asarco LLC (Asarco).
High Cash Balance; Long-Term Debt Maturities:
Grupo Mexico exhibits strong liquidity with consolidated cash and marketable securities of over USD3 billion comfortably covering impending consolidated debt maturities at the subsidiary level up to 2020. On a standalone gross debt basis, Grupo Mexico held no debt as of Sept. 30, 2013. The company does not have a dividend payout policy, providing liquidity flexibility during volatile periods and in times of large investments. Fitch's base case scenario indicates net debt-to-EBITDA to remain below 1.0x for 2013, peaking at 1.4x in 2014, and deleveraging thereafter. Cash held at the SCC level was USD1.8 billion as of Sept. 30, 2013, comfortably covering its next debt amortization due in 2015 of USD200 million, and 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 underway in Chile, Argentina and Ecuador. AMC benefits from its 81.8% ownership of SCC and 100% ownership of Asarco, located in Arizona. Asarco and AMC are debt free as of Sept. 30, 2013. The mining division currently makes up 78% of Grupo Mexico's consolidated revenues and 82% of EBITDA. Grupo Mexico's and AMC's ratings are linked to those of SCC and follow Fitch's parent-subsidiary linkage criteria, which indicates strong legal and operational ties between the companies including centralized treasury and management commonality.
No Impact on Rating Expected due to Mexico's New Mining Tax:
The recent decision by the Mexican government to levy a 7.5% royalty tax on EBITDA for its mining companies could lead to Grupo Mexico directing its future investments more heavily in Peru and other countries across the region. Fitch's base case for 2014-2017 indicates strong positive free cash flow (FCF) post-2015, EBITDA margins above 46%, and robust credit metrics with funds from operations (FFO) adjusted leverage below 2.0x 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 59% of group revenues and 64% of EBITDA in 2013. SCC's average net debt-to-EBITDA ratio for the last five years was 0.3x, 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 USD3.18 per pound in 2014 and a long-term price of USD2.72, and for zinc of USD0.86 per pound in 2014 and a long-term price of USD1.00 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. SCC has five smaller mines in Mexico producing zinc, with copper and silver as the main by-products. The company negotiates long-term labor contracts with seven unions in Peru and two in Mexico, dissipating labor-strike risk.
Operational Synergies:
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 revenue split by product for the first 9 months of 2013 was as follows: copper 78%, molybdenum 6%, silver 7%, zinc 3%, sulfuric acid 3% and other (including gold) 3%. SCC's revenue split by market for the same period was: U.S. 20%, Europe 17%, Mexico 28%, Asia (including China) 14%, Brazil 8%, Chile 6%, Peru 5% and other Latin America 2%. This allocation provides plenty of upside for the company to increase sales to Asia, especially China, Japan and India.
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 and its strong profitability while maintaining a very conservative leverage profile the last five years. This was achieved despite prolonged labor strikes and other contingent liability issues over this time. The company's cash cost per pound of copper for the 9 months to 2013 was USD0.99 per pound net of by-products, and USD1.92 per pound excluding by-products. While this marks an increase from USD0.63 per pound net of by-products and USD1.70 per pound excluding by-products for the 9 months to 2012, the company still retains its first-quartile operating cash cost position. For comparison, Corporacion Nacional del Cobre de Chile (Codelco: LT FC IDR 'A+') had a cash cost of production of USD1.71 per pound of copper net of by-products for the first six months of 2013.
Industry-Leading Reserves:
SCC's ratings are supported by its substantial copper reserves of 67.1 million metric tons of contained copper that equates to over 100 years in mine life at current production rates. This position ranks SCC at No.1 among globally listed companies, above Codelco, Anglo American Plc (AA: LT FC IDR 'BBB+'/Stable), Freeport McMoRan Copper & Gold Inc. (Freeport: LT FC IDR 'BBB'/Stable), and BHP. As of 2012, SCC's total copper production of 651,801 metric tons ranked it as the world's fifth-largest copper mining company.
Lower Production Expected in 2013:
SCC's direct copper production is expected to be lower in 2013 at around 607,000 metric tons compared to around 638,000 metric tons in 2012 as a result of a combination of factors including a flood at the Buenavista mine due to excessive rain and a percentage of volumes being absorbed as copper in process at the company's Peruvian refinery. Current investments, excluding the planned Tia Maria mine in Peru, will result in production of more than 1 million metric tons of copper per year from 2016.
Rating Sensitivities:
A downgrade or Negative Outlook could take place due to one or a combination of the following factors: if SCC's net debt-to-EBITDA increases sharply above 1.5x and it begins to exhibit weakening cash flows; if there is a prolonged deterioration in copper fundamentals below historical trends affecting 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; if widespread industrial action severely curtails mining operations.
A greater diversification of SCC's business profile combined with an extended period without significant contingent liabilities' risk could lead to a Positive Outlook or ratings upgrade. 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 approximately 20% of revenues and 15% of EBITDA,.
Fitch affirms the following ratings:
Grupo Mexico
--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' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug 8, 2012);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=809717
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