Grupo México: Mining

The Company

Grupo México (GMEXICOB) is primarily a mining company but also has operations in several different sectors and ranks among the most important mining companies in Mexico, Peru and the US. GMéxico has the largest copper reserves worldwide and is also the fourth-largest copper producer. Likewise, the company is a leader in low-cost production with fully integrated operations. However, GMéxico is much more than just a huge mining company. The company also incorporates the largest multimodal rail service in Mexico and has a substantial infrastructure development division with attractive growth prospects. GMéxico has been listed on the Mexican Stock Exchange since 1978 and is the sixth most traded stock. The group’s principal divisions are mining, transportation and infrastructure, which has led to the development and creation of other companies. The mining division generates the majority of revenues with around 80% contribution and is comprised of Southern Copper Corporation, which includes Minera México and Southern Peru, as well as Asarco in the US.

Meanwhile, the transportation division is made up of three large railroad companies. Together, they form Mexico’s largest railroad operator, both in terms of coverage and fleet size. The principal subsidiaries in the transportation division are Grupo Ferroviario Mexicano–Ferrocarril Mexicano (GFM-Ferromex), Ferrosur, and Intermodal México. Ferromex operates the country’s largest railroad, with a network of 8110 km covering 71% of Mexico’s territory and almost 80% of industrial and commercial areas.

GMéxico began its operations in the construction industry as México Compañia Constructora (MCC) and has remained in this field since 1942. The group’s infrastructure division is comprised of three firms: MCC, Perforadora México (PEMSA) and Consutec.

GMéxico is one of the few copper producers worldwide that maintains an aggressive expansion plan. Aided by cost reduction, despite higher taxes, the company is expected to increase its capacity by around 65% to 1.4m tonnes by 2016, up from 830,000 tonnes in 2013. This will help the group to become the second-largest producer of copper worldwide. The expansion of Buenavista, the largest mine in Mexico, which will be developed in 2014, is a particularly key development. Under a scenario of stable copper prices and higher installed capacity, the prospects for GMéxico are positive. One of the main catalysts in the short run will be whether projects are developed on time and within budget. The company’s cost structure is one of the most efficient in the industry, with a cash-cost of around $1 per pound of copper. GMéxico is investing in two power plants, with the aim of being self-sufficient in its consumption. Energy costs account for 30% of total production costs and savings are expected to be about 20%, which should translate into savings of 5-6% in costs in Mexico, in turn positively impacting margins.

Development Strategy

According to our projections for 2014 we estimate that GMéxico’s revenues will reach $10.9bn and an earnings before interest, taxes, depreciation and amortisation ( EBITDA) of $5.2bn, representing year-on-year growth of 13.7% and 18.1%, respectively. In the mining segment, we expect an EBITDA of $3.9bn, with an average copper price of approximately $3.30 per pound, offset by higher levels of production. While a new 7.5% tax on EBITDA over mining operations was established in Mexico in January 2014, geographic and portfolio diversification will mitigate the negative impact of the new tax. Mining operations in Mexico account for 54% of the EBITDA of subsidiary Americas Mining Corporation, so the impact at the consolidated level should be mitigated with the operations of Peru (33%) and the US (13%). We estimate that the total impact should be less than 3% on consolidated EBITDA (which is already taken into account in our projections). We have forecast a 2014 year-end target price of MXN50 ($3.89) for GMéxico.