Higher Metal Prices save Grupo Mexico

Lima, Peru — Soaring global copper prices could not have come sooner for Grupo Mexico, the world’s third-largest copper producer.

Just a few years ago the Mexico-City-based company was struggling to meet its huge debt payments as the Sept. 11, 2001, attacks on the United States dampened world economic growth and demand for the red metal.

Indeed, Grupo Mexico’s bold US$2.3-billion takeover of U.S. miner Asarco in 1999 was followed by a substantial fall in metals prices, leaving it vulnerable and unable to refinance its debts.

Today, after a long restructuring process, its finances tell a different story. The company forecasts earnings before interest, taxes, depreciation and amortization (EBITDA) of US$2.5 billion this year, as copper prices hover around 16-year highs. Grupo Mexico, which built itself up from a small Mexican miner into an international player with the Asarco takeover, could not have dreamed of things going any better.

In 2001, the price of copper traded around US65 per lb. Now, it is above US$1.75 per lb., as voracious demand from China’s fast-growing industrial sector drives up prices and global copper stocks lie almost vanquished.

But Grupo Mexico’s turnaround has taken time and Asarco was almost the death of the company. As copper prices sank from 2001 onwards, the company, which also owns a railway division, scrambled to meet debt payments and got its healthy companies to borrow huge sums of money.

Prior to the Asarco purchase, Grupo Mexico’s gross debt totalled US$1.4 billion. That load more than doubled to US$3.22 billion in 1999. Today it is now back down to US$1.4 billion.

One of the company’s smartest moves was to merge its Mexican mining arm Minera Mexico, which was founded in 1974, with its Peruvian subsidiary, Southern Peru Copper (SPCC) (PCU-N), which came with the Asarco purchase.

That created the world’s second-largest copper miner by market capitalization and reserves in April this year. The in-house merger allows the company to generate “a tremendous amount of free cash flow that allows for all forms of intrinsic expansion and projects,” the company says.

With a market capitalization of US$7 billion and a projected production of 700,000 tonnes copper this year, SPCC expects net profits of US$1.2 billion this year, while the merger gives Grupo Mexico a New York listing via SPCC.

The new, improved SPCC now counts Mexico’s biggest mines La Caridad and Cananea and Peru’s Cuajone and Toquepala pits among its arsenal, as well as the Ilo smelter on Peru’s southern coast and the La Caridad refinery.

Those Mexican mines are no ordinary pits. Cananea is the world’s fourth-largest in terms of reserves, and Cananea and La Caridad have an 80-year life, making them a key source for China and for India’s surging demand for metals.

The company hopes to increase output in Mexico by one-quarter between 2006 and 2009, as the merger allows it to upgrade technology and tap deeper, richer ore. La Caridad and Cananea produced 320,640 tonnes of copper concentrates in 2004, 10% more than in 2003. La Caridad smelter produces some 240,000 tonnes of refined copper a year. Cuajone and Toquepala produced almost 400,000 tonnes copper concentrates in 2004, 6% more than in 2003. Output is expected to fall 8% this year due to lower ore grades at Cuajone. SPCC expects output of 350,000 tonnes of copper concentrates a year between 2007 and 2015. Ilo produced 280,680 tonnes of copper cathodes in 2004.

While Grupo Mexico’s Peruvian mines do not have such large reserves as Cananea and La Caridad, SPCC hopes to bring its Tia Maria copper project in southern Peru into operation in 2008 as a leaching operation with grades of 0.4% copper. The company does not yet have production estimates, but the mine is expected to have a 15-year life and will produce cathode.

Southern Peru is also building a new smelter in Ilo to process 1.2 million tonnes of concentrates. It should be in operation by 2007.

The new SPCC does have its debts, however. As part of the merger deal, Lima-based SPCC took on Minera Mexico’s US$1.04 billion in arrears, a potential worry for investors accustomed to a Grupo Mexico strategy of using a robust company to save a struggling one. Yet high minerals prices will play their part. In August, SPCC repaid a US$200-million bank debt and Minera Mexico paid off US$480 million in money owed, and could repay another US$120 million in the next few months. Although the payments do not cut Grupo Mexico’s total debt, they reduce pressure from creditors.

And Grupo Mexico has pressure enough dealing with Asarco, which filed for bankruptcy protection in the United States in August after an asbestos scandal and a lengthy strike by workers in Arizona and Texas.

Initially billed as the jewel in Grupo Mexico’s crown that gave the Mexican miner a place in the big league of metals producers, Asarco quickly became a liability. It also came with a host of environmental problems. The company has been ordered to clean up environmental damage in Idaho, Texas and Colorado and has also been hurt by litigation seeking compensation for health damage caused by lead and asbestos contamination by mines in Arizona and Texas.

Perhaps it should come as no surprise that Grupo Mexico is now widely expected to sell off Asarco’s three open-pit copper mines, its two copper smelters in Arizona and a copper refinery and precious metals plant in Texas.

Grupo Mexico can be forgiven for buying Asarco — the miner was at one stage an important world producer, with output well above 200,000 tonnes copper annually.

But last year’s production was 160,000 tonnes and attempts to raise that to 180,000 tonnes this year have been foiled by an ongoing workers’ strike that began in July. About 1,500 workers downed tools in early July after they rejected cuts in benefits, citing record metals prices. Miners and Asarco are also at odds over who should represent the company if it is sold. Meanwhile, Asarco faces 95,000 asbestos-related health claims from former workers plus the high costs of cleaning up its disused mines. It is also struggling to pay for its power and is US$5 million in arrears on its electricity bills. It is contemplating hiring replacement workers to increase production.

— The author is a freelance writer based in Lima, Peru.