Latin Finance - January/February 2011 - 63

grupo méxico

Morgan Stanley is financial advisor while Skadden, Arps is legal counsel to Grupo México and AMC. Muñiz stresses that the combining of the two companies cannot be pushed through, despite Grupo México having 80% ownership of Southern Copper. “It could take some time, they have started due diligence, we started meetings in November and we expect it will be over by Q2 next year, though hope to do it in Q1,” the CFO says.

through zero-cost collars with a an average floor price of $3.00 per pound and an average cap of $4.45 per pound. Muñiz adds that while the company is focused on cost cutting and operational efficiency, Grupo México is conservative with financing. “If you looked at our leverage ratios compared to our peers we had a strong balance sheet during the crisis, and this provided us with an opportunity,” says Muñiz. “We did a very aggressive, almost $1 billion buy back of

Cautious Amid Volatility

The potential for volatility in the price of copper, exemplified by the fact that in December 2008 it went to $1.29 per pound after having reached a peak in August of $4.08 per pound, means the company has recently entered into copper hedge contracts. The cost of copper was $4.00 per pound mid-November. When copper prices dropped to $3.50 per pound at the end of September 2010, the company started hedging the production for 2010 and 2011. “When we think the peak of the cycle has been reached we lock in important margins, which gives us and our shareholders certainty in terms of revenues and capex,” says the CFO. For the last three months of 2010, Southern Copper hedged 58% of its production. Southern copper produces 500,000 tons of copper per year, which represents 79% of Grupo México’s total production. It has done this through swap contracts at an average price of $3.67 per pound. For 2011, it has hedged 11% of its copper production through swaps at an average price of $3.73 per pound and 16% of its production with an average floor price of $3.00 per pound and an average cap price of $4.54 per pound. For the fourth quarter 2010, Asarco hedged half of its annual 200,000 tons of copper production, or some 30% of Grupo México’s total output. It does this through swap contracts at prices averaging $3.50 per pound and 50% of its production through collars with an average floor price of $3.00 per pound and an average cap of $4.00 per pound. For 2011, Asarco has hedged 37% of its production through swap contracts at prices averaging $3.70 per pound and 47% of its production

Copper output 2010-15 (tons, m)
More than doubling supply Southern Copper 2010 2011 2012 2013 2014 2015 Total
Source: Grupo México

Asarco 220 220 220 220 220 220 1,320

50%, which provide significant growth potential for this company, says Muñiz. However, in November the Mexican anti-trust commission filed a complaint, though Grupo México expects this to be resolved in 3-5 months, after which the merger is expected to take place, in 2011. “Being able to merge will give us the ability to create synergies among five gateways along the border and four sea ports in the Pacific Ocean and the Gulf of Mexico,” says Muñiz. Regarding the IPO, Muñiz adds that the merger decision needs to be made before a valuation can be made, though he says the Mexican capital markets are in a good condition to float the company.

500 640 710 900 900 1,000 4,650

Rosy Decade Ahead

shares as a group.” This took place during late 2008 and early 2009, and resulted in a rise in the company’s Southern Copper position to 80% from 75%. The CFO adds that the company is always on the lookout for opportunities for liability management or other ways of improving the capital structure, as Grupo México is committed to maintaining investment grade status, though it does not have any plans for any liability management.

Merging Railroads

The company’s railroad division, ITM, which has a 55% share of the railroad industry in Mexico, is looking to consolidate its two subsidiaries, Ferrosur and Ferromex, and IPO the infrastructure division. Analysts say the enterprise value of the assets is $2.5 billion, and expect the IPO within the next 12 months. When the company acquired the railroads in 1998 only 8% of cargo was transported via rail, now it is 20%, though this compares to the US and Canada’s

Volatility in copper prices, sizeable capex requirements and fairly consistent labor challenges in Mexico and Peru, as well as the potential for taxes and royalty payments to go up could hinder the company. The sector is exposed to political, financial and operational risk that can significantly impact company performance. Analysts add that there is a lack of transparency and access to senior management. They add that as the heads of operations in Peru and Mexico are in their 70s, there is also uncertainty over who will take over. Despite this, confidence in the company is clear. Santander in mid-2010 raised its forecast on Grupo México’s 2010 and 2011 Ebitda estimates by 4.9% and 15.7%, respectively. “The company has some fantastic assets and it is generating significant cashflows,” says Rene Kleyweg, mining analyst at UBS. “The next decade will be good for the company as it moves away from litigation to a focus on its operations and running its assets.” If Muñiz is right that company disputes will be resolved, and if Grupo México can successfully combine this with aggressive cost cutting and cautious financing, the Mexican miner appears set for further profit growth. LF

UPDATE

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January/February 2011

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Latin Finance - January/February 2011

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