Grupo Mexico GMEXICOB
November 01, 2020 - 12:31am EST by
flubber926
2020 2021
Price: 60.25 EPS 0 0
Shares Out. (in M): 7,786 P/E 0 0
Market Cap (in $M): 21,801 P/FCF 0 0
Net Debt (in $M): 412 EBIT 0 0
TEV (in $M): 22,213 TEV/EBIT 0 0

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Description

 

Company Overview 

GMEXICO is one of the top 5 largest companies in Mexico with a current market cap of $21,619 Million USD. is listed on the Mexbol had 2019 sales of $10,680 Million USD. 

Holding company Grupo Mexico is one of the world leaders engaging in copper mining and production. It operates in three core business Mining, rail transportation, and Infrastructure. Their mining division owns interest in 15 underground and open pit mines, as well as 13 exploration projects in Mexico, Peru, United States, Chile, Ecuador, and Spain. Their transportation division operates a railroad network of 10,570km across 24 states in Mexico and Florida, access to 9 ports (6 of them exclusive), 5 border-crossings (all exclusive). 20% of revenues stem from Florida East Coast (FEC). Their infrastructure division offers land and marine drilling services, such as the leasing and operation of oil rigs; Engineering services, generates energy through two combined cycle plants and a wind farm, and constructs and operates highways. Finally, Grupo Mexico owns 8.09% of Grupo Aeroportuario del Pácifico GAP which is one of the three main airport operators in Mexico and Jamaica with Guadalajara, Puerto Vallarta, Los Cabos, Tijuana, Kingston among others in their portfolio.   

 

Mining Division: 

Represented by its subsidiary Americas Mining Corporation AMC whose subsidiaries in turn are Southern Copper Corporation in Mexico and Peru; Asarco in the United States and Minera Los Frailes in Spain. Americas mining Corporation has the world´s largest copper reserves and fourth worldwide in terms of production. Their low-cost structure (lowest cash cost in the industry) driven by fully integrated operations, and management focused on cost efficiency, makes them the most profitable copper mining company in the word with a cash cost per ton way below the average of its peers 

 

 

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Grupo Mexico´s 88.9% Ownership in Southern Copper (SCCO) (the number 1 copper asset in the world) showed excellent management skills during the pandemic with a very challenging first half of the year. Mining activities were considered not essential and therefore stopped during the 2nd quarter. Even facing challenges like never before seen SCCO is still expected a 2020 flat copper production at 997,100 tons (82.3% of revenues)an increase to 28,000 tons of Molybdenum (6% of revenues), an increase to 22.7 million ounces of silver (5.6% of revenues). A flood in Santa Eulalia caused Zinc production (2.7% of revenues) to decrease 11%, which should recover in the 2nd half of 2020. Increased costs of 103 Million due to higher inventory consumption as well as lower mineral prices were partially offset by increased production and lower costs driven by lower diesel and fuel. In a torrent environment management proved capable of adapting to mitigate both the impact reflected on the price of copper and the operational disruptions.  

The future looks bright on AMC (Americas Mining Corporation) as exploration and investments will commence to yield benefits by 2024. Five mayor projects on the pipeline include:  

  • Tia Maria a 1.4 Billion USD project in Peru that has finally been able to overcome regulatory challenges in October 2019. 

  •  Michiquillay 2.5 billion investment also in Peru able to produce 225,000 tons a year.   

  • Las Chancas 2.8 billion investment able to produce 150,000 tons a year which will make GMEXICO´s total investment in Peru total 8.1 billion.  

  • El Pilar Sonora Mexico, able to produce 40,000. 

  • El Arco in Mexico able to produce 250,000 

 

 

Current Situation Copper  

 

During the second and third quarter of 2020 copper went on a rally from 2.3 USD per pound to 3.10 USD, mainly caused by 2 factors, supply disruptions from producing countries like Chile and Peru which suffered from social unrest augmented by COVID 19. And a strong increase in China´s demand as the country recovers 

First let us review the key factors affecting the supply side: 

Currently Peru´s “Camara Legislativa” is undertaking a process to evaluate removing the president from office, meanwhile Chile´s strong social unrest is pushing authorities to rewrite a new constitution. Political uncertainties of such are often taken advantage of by syndicates to get better wages, royalties, and conditions in general. A total production of 600,000 tons has been lost during the first half of the year but what worries the market the most is that out of that total 400,000 came from Peru and Chile alone. 

On the demand side China grew 10% YOY during the first half of the year surpassing expectations. China inventory deficits as they never expected demand to be this strong, which resulted in the arbitrage spread from London to Shanghai to be so open that a trader could make 6% just from crossing a ton of copper from Korea to Chinamore recently as the arbitrage spread has now closed is safe to assume imports coming into China on the 2H of the year will not be as strong but construction is getting a strong push from the government (a main driver for copper prices)private construction is slowing recovering and so are retail sales. In the short term the balance in the supply/demand curve favors a strong copper price 

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Long Term Situation Copper  

The cumulative demand for copper is expected to remain balanced with a slight over supply through 2023 but from 2024 onwards the cumulative demand will exceed its reserves and reserve base finally reaching a huge deficit by 2050. Most copper producing countries will not be able to sustain their production until 2050. The world will experience critical copper supply gap within 25 years, based on what is considered a reasonable extrapolation of 2% growth per year. Predictions are in line with the International Copper Study Group [ICSG, 2017], which showed that world refined copper balance projections indicate a deficit for the year 2023, and the world copper production forecast indicated that beyond 2024, the supply gap would start widening as the demand for copper would be higher than copper production. 

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World demand for copper will significantly increase because of four main factors that will drive demand during the next decade: 

Copper known to be useful for electrical applications because of its characteristics as an excellent conductor of electricity, and cheaper than silver or gold, corrosion resistance, ductility, malleability, and ability to work in range of electrical networks that makes it ideal for wiring. 

5G: The high frequency waves used in 5G networks have shorter ranges than the low frequency waves used on 4G networks and there will be a need for new for a higher proportion of base stations, each base stating requires 12 kg of copper.  Buildout will require a lot of fiber and copper cable to connect equipment related to The Internet of Things as many objects today use no electric installations, but tomorrow a wide range of everyday objects will in order for companies to generate data and study consumer trends.  

Electric Vehicles: Production of electric cars is intensive in copper consumption, with the electrification/ hybrid trend of automobiles (expected demand of electric cars will increase from 5% to 40% in 2030) for perspective a normal ICE ( Internal Combustion Engine) has a 20kg copper requirement, a Hybrid car has a 60 kg copper requirement and finally an electric car has a copper requirement of 80kg to a 100kg. A high-speed train network requires 10 tons of copper per km of track, electric locomotives contain over 8 tons of copper. A hybrid electric bus has 89kg of copper and 224-369 kg goes into a battery powered electric bus.  

Clean Energy: As the world distances itself from fossil fuel and becomes more sustainable and aware of climate change, focused is shifted into clean energy production, a 3 MW wind turbines uses 4.7 tons of copper while 1 MW of a solar panel installation uses 5.5 tons of copper, and not to mention cabling, wiring, switches and energy storage. 

ConstructionWith incremental GDP and population growth comes incremental housing, the construction industry would not exist without copper; it is essential for wiring, potable water, and heating systems.  

Total copper consumption will exceed 43 million tons by 2035, driven by population and GDP growth, urbanization, and electricity demand. In a market which produces roughly 28 million tons today. 

 

Transportation Division: 

Grupo México de Transportes GMXT is a public company with a market cap of 5,433 Million USD 70% owned by GMEXICO and listed on the Mexbol. 

GMXT has the widest coverage in Mexico, as it operates over 10 thousand km, with access to 9 ports and 5 border crossings, additionally the company owns Florida East Coast FEC which has access to the Miami port and runs all the way to Jacksonville 

Railroad transportation in Mexico is an under penetrated market, over time railroads have gained significant market share from trucks but still have a significant lag. With improving logistics and supported by more competitive pricing and unparalleled connectivity GMXT has been capturing more and more market share, allowing the company to double its market share in 20 years.  

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Tailwinds in the Industry:  

  • Train transportation has proven exceptionally resilient during this pandemic as most of its client remained operational, which gives proof of the company´s strong fundamentals. 

  • GMXT will benefit from greater visibility on the trade front in North America with the USMCA trade deal sign and operational as well as from the US and China tensions. 

  • Profitability should continue to improve as management´s investments in Precision Scheduled Railroading PSR and other efficiency-boosting initiatives yield benefits. 

  • Attractive at market valuations with the highest dividend yield and most discounted valuation relative to all North American railroad operators besides a 14% IR. 

 

 

Recent Transactions 

Kansas City Southern (GMXT only competitor in Mexico) has been subject of multiple acquisition bids by Global Infrastructure Partners and the infrastructure arm of the Blackstone Group to buy the company in the 14x EV/EBITDA range and got repeatedly rejected. This event sets a good precedent of just how cheap GMXT at a 7x EV/EBITDA valuation being KSU an inferior competitor which possesses far inferior assets.  

 

Infrastructure Division: 

The Infrastructure division although it doesn’t represent much of the company it is still a promising business with EBITDA margins over 50% during the first half of 2020, and will be well positioned as the country will need infrastructure spending to rebound from the economic collapse caused by COVID 19.  

With two combined cycle plants and a wind farm GMEXICO´s infrastructure division has the experience it needs in producing clean energy in a changing world supporting sustainability. 

 

Grupo Aeroportuario del Pacifico 

Grupo Mexico owns 8.09% of GAP which operates in Mexico and Jamaica, 57% domestic and 43% international. Passenger traffic has been obviously affected by the coronavirus outbreak but as the worst is behind and passenger traffic is slowly improving this equity holding for GMEXICO holds significant upside. 

 

Valuation and Holdings Discount: 

 

2019 

2020 

2021 

Revenues  

10,683 

11,289 

11,652 

 

 

 

 

EBIT 

3,905 

3,643 

4,042 

 

 

 

 

EBITDA 

4,948 

4,871 

5,310 

 

 

 

 

EBITDA Mg. 

46.3% 

43.1% 

45.6% 

 

 

 

 

FCF 

1,837 

1,950 

2,265 

 

 

 

 

FCF @15x 

27,560 

29,247 

33,971 

 

 

 

 

 

 

 

 

non-core  

152 

152 

152 

Provisions 

-890 

-890 

-890 

Cash  

0 

0 

0 

 

 

 

 

 

 

 

 

Total Equity Value  

26,822 

28,508 

33,233 

Target Price  

67.7 

77.0 

89.8 

Upside 

30.4% 

36.8% 

59.5% 

 

 

 

 

 

 

Grupo Mexico has traded this past decade with a holdings discount to its sum of the parts average of 28% and currently holds a 46% discount almost as far apart as it has ever been, which its unsustainable on the long run. We previously mention not only the strong fundamentals in the copper industry long term, but significant upside in the railroad division and their equity investments will only spread more the holding discount.  

Possible action to reduce this discount by the company could be to increase its dividend. While SCCO has sustained its dividend in dollars over the past 10 years, GMEXICO´s dividend has not taken into account the depreciation suffered by the peso, in 2016 the peso was trading at $17 MXN/USD by 2020 the peso has traded in the $21-24 MXN/USD range by adjusting and increasing their dividend year over year (something the company has recently mention willing to do) more investors will be attracted to the name and therefore closing the big gap on the holdings discount The holding discount has been at is lowest in 2013 when expansion projects entered the picture which will happen again in 2024.