Not financial advice. Full disclaimer available here.
The underperformance of GMEXICO in the last 6 months is remarkable. Why is the stock lagging behind its peers so much?
Here is a possible explanation:
If you recall this chart from the original thesis, you’ll note that the larger projects have all been differed:1
Tia Maria was planned for 2025 and it has now been pushed back to 2026
Smelters: 2029 instead of 2026
Los Chancas: 2030 vs 2027
El Arco: 30 vs 28
Michiquillay: 32 vs 29
Those changes impact CapEx and production forecasts which in turn alter the net present value of the company. But when investments get postponed, that actually improves free cash flows in the near term. It also helps copper prices stay “higher for longer” because new supply does not come online as fast. So the delays are not necessarily negative for the valuation.
The political situation in Peru could be another reason for the disappointing performance in Grupo’s share price.
On December 7, 2022, the Peruvian congress invoked its powers under the Constitution and removed President Pedro Castillo from office. Mrs. Dina Boluarte, the Vice President, immediately assumed the presidency. These fastmoving events led to considerable upheaval, particularly in the south of Peru, where acts of vandalism and violence have escalated. Roadblocks are scattered throughout the country, which has negatively affected the normal course of business in various regions.
Southern Copper’s operations have not been impacted yet. Still, the majority of the subsidiary’s projects are located in Peru: 475 out of 755 tons, according to the chart above. That’s 63% of the growth. Similarly, about 60% of copper reserves are in Peru. Therefore, instability in the country is a concern for the Mexican conglomerate, which owns 89% of Southern Copper.
The good news is that Peru is not as significant when we consider all the businesses that are part of Grupo today.
First, most of the copper produced by the company currently comes from Mexico, around 60% based on Southern Copper’s filings (see footnote #2).2 Second, the Mexican mines are more profitable, as evidenced by higher gross and operating margins in the segment information. So Mexico really makes up ~ 2/3 of SCCO's earnings against 1/3 for Peru.
At the group level, management does not break down financials by geography. This means the contribution from US mining is unknown. We do know, however, that the cost of producing a pound of copper is almost 3 times higher than in LATAM. So the US activities have no material impact on the bottom line of the parent company. But 112kt of annual copper production has to count for something: $1bn at only 1x sales.
If 2/3 of mining profits ($2,536m) can be attributed to Mexico, and Grupo’s price-to-earnings ratio is 11.4 as of Friday’s close, that means the core business is valued at $19.3bn = 2,536 x 2 / 3 x 11.4
In 2022, Grupo earned $481m in net income from its transport business. Since transport is less cyclical than mining, the business deserves, at least, the same P/E multiple as the Group. So transport is worth circa $5.5bn = 481 x 11.4
The infrastructure business is worth $1.5bn according to the balance sheet.
In sum, Peru accounts for less than 20% of Grupo’s market cap, as illustrated by the chart below:
$6.2bn implies very low price multiples for one of the largest and most efficient copper mining business in the world, namely Southern Peru. Therefore the current share price of GMEXICO might already be discounting a bad outcome in Peru. The risk is there but it’s not existential given the valuation.
The February 2023 presentation from Grupo Mexico still displays the same project timeline than last August. Investor relations confirmed the chart above is the correct one.
That’s true for the last 4 years and the next 5 years:
US tickers mentioned: SCCO 0.00%↑ ; COPX 0.00%↑