Grupo Mexico is Mexico's largest mining company and the world's third copper producer. You are also involved in Mexico's railroad business. What does each of the activities represent in the whole of the group's annual revenues?
Grupo Mexico is basically integrated by two subsidiaries. One subsidiary is our mining group, which constitutes a mining group of Canada, USA, Mexico and Southern Peru as well. The other division is our railroad and transportation division, which is the largest railroad infrastructure in Mexico. With that railroad we cover about 90% of the country's commercial and industrial area.
The mining subsidiary represents about 85% of the revenues of the company and the railroad group covers the remaining 15%. So essentially that constitutes Grupo Mexico.
Grupo Mexico's 2Q 2000 results showed an increase in sales by 94%, operation profits by 122%, and net earnings 20%. In a rather difficult time for the mining business, even though international prices are picking up, how do you explain these figures and do you expect this trend to continue in the next quarters?
Well I'm going to answer that in two ways, first of all, last downturn in the commodities part last year and probably in 96 to 99, were due to depressed copper prices in the market. We were a low cost producer, so at that time we were able to reduce our cast break even costs per pound of copper, which is the way we measure that, well below most of our competitors, when we reached this copper downcycle, that gave us an opportunity to go and acquire companies because we had the cash and we had the balance sheet which enabled us to purchase ASARCO last year in a leverage buy out. Today the result of the acquisition of ASARCO were the synergies by integrating these companies in quite substantial terms.
You asked me if the first quarter can be kept up, or if the second was rather stronger than the first quarter of this year. We reported those results last Friday. The results were stronger for a couple of reasons, despite higher energy costs and despite lower prices on the market for the second quarter as compared to the first quarter, we were able to sell more copper, we were able to save an excess of $80 million USD in the combined company towards the first half of the year alone. That means, if we annualize that figure, we have already saved between our Peru and US operations about $160 million USD, that means to the bottom line, added value for the shareholders.
What are the main factors that may influence the achievement of positive results for the rest of the year, is it the international prices?
There are a couple of things that are going to be important while going forward. First of all, you will see continue savings, especially in the administrative areas that did not take effect in the first half, so that is going to mean more money.
Secondly, we are very well positioned for the commodities price upswing. If you look at copper alone, the price has averaged throughout the year approximately in 81 cents per pound of copper and right now copper is at 87 cents per pound, just beginning last week. So every one-cent change in the price of copper in the market means an additional $21 million dollars of additional operating cash flow for the company, so that is very important as you know. We are very well positioned for the second half of the year .
You talked about the purchase of ASARCO which took place last year and Grupo Mexico is also looking for companies in Mexico or the United States or Peru. You already invested this year $677 million into expansion. Tell our readers basically what your expansion strategy is through the Americas.?
Essentially that depends on a couple of things. First, how fast we can consolidate the ASARCO and the Southern Peru acquisition. Today we've been very successful going back to the point I skipped, for ASARCO was a company that lost about $170 million last year in operating cost flow. This first quarter we were able to turn it around for the first time in years to positive numbers in excess of $11.5 million. That's the ASARCO operation.
The Southern Peru is generating 88% more cash flow than the same period last year. So the turnaround of these facilities has been ahead of schedule, and that gives us an opportunity to open the board to other areas. First of all, we had a good strategic first quarter in Southern Peru because we own a lot of the facilities there, a lot of the infrastructure in terms of ports, trains, railroads, and we also own the value adding operations which are the smelters and refineries in that region. So that gives us a good strategic foothold in that area for other smaller companies in the area to join us significantly because they have lack of access to capital markets, and mining is a very high fixed cost industry were you need hundreds and millions of dollars to develop properties. So, if they join this new mining company, which right now is the third largest in the world in terms of copper, we could become larger, they could benefit from shareholders, so could our shareholders. So that is what we hope to do in the rest of South America but also in North America where we also have a strong foothold certainly in Mexico and southern USA and now in Canada.
Don't you fear the international reaction against Fujimori's reelection in Peru will affect your business there?
Well, so far, we haven't been affected yet and I don't thing we will be. First of all, the reason we want to be the geographically diversified company, is because we have operations across the world or across so we can medicate them.
Point number 2 is that copper both in Peru and Mexico, but more so in Peru, is an export business and an international business, so we don't depend much on the local consuming economy since we export most of that product to the USA anyway. In addition the Fujimori government has had some issues, these issues have not been so significant that we cannot obtain the correct financing. In fact, three weeks ago, we went down to Peru and we had a successful Peruvian bond offering, which is fully dollarized and the interest rate was approximately 8.3%. In today's market that means we were very successful. So I think we will continue to expand in Southern Peru, it's again a main focus of our future plans.
In the context of your Peruvian operations, as a matter of fact, Grupo Mexico announced in June that it is planning to invest 600 million USD to modernize its subsidiaries of Southern Peru Copper Corporation. Do you foresee any similar modernization plans within Grupo Mexico?
Absolutely, this year we hope to invest in our Mexican facilities in excess of $16 million USD. This year we will be building and we have already initiated the low cost leasing copper facility in Cananea which will add about 22 thousand metric tons of low cost copper production to the Mexican facilities. We are also investing approximately $70 million USD in our USA facilities and Peru is the most significant investment because we need to modernize the facilities in the iloport, which is the smelter that currently does not comply with environmental regulations. So in order to comply with environmental regulations we are modernizing those facilities. In order to expand capacity and have an economic return for our shareholders, we are also investing in technologies that expand that capacity and allow us to integrate the entire production or the business system of value adding in southern Peru. So that keeps the money inside our own operations. So instead of selling concentrates in the market which do not have the added value that refined copper does.
Could you give us some details about the ongoing negotiations aimed at finalizing a joint venture agreement, particularly in the exploration field, with your main competitor in copper mining, the Chilean Copper CORELCO?
We are still negotiating a potential joint venture to explore for new copper deposits in Chile and Peru together. I can't give you many details right now because, obviously we are still in the negotiating table. How we managed to do this is really very simple. CORELCO has a very strong presence and they own many properties to explore, obviously within Chile, and we have the same in Peru, so its only natural for us to integrate forces and try to find something and take advantage of our scale economies.
What do you expect to be the benefit for Grupo Mexico out of this agreement?
The benefit is that we'd probably duplicate the reach of the properties we are able to explore and implementing half of the investment. CORECO has huge reserves or areas of land only they can explore, this gives us access to those properties as well. That would be the benefit for Grupo Mexico: we can expand our reach in terms of exploration at a cheaper cost.
Your debt reduction plan included the sale in June of the American Limestone Company for $211 million USD. What is your next step in the group's debt restructuring strategy?
Let me take a step back and take you back to the ASARCO acquisition. As you recall, ASARCO was a leveraged buyout acquisition. For that acquisition we obtained a bridge loan facility in the amount of $817 million USD from Chase so we could acquire ASARCO shares. The remaining came from equity or assumed debt that was already in ASARCO. In essence, the incremental debt was exactly that bridge loan facility for $817 million USD. Our compromise was to reduce facility during this year by 100% or eliminate it. So the steps we have taken is to sell the non-core or non-strategic assets of ASARCO that were non-mining, such as a specialty chemicals company known as ENTHONOAMAI which we sold in early January to XXX GROUP PLC of England for the amount of $513 million USD. This went straight to pay down the acquisition facility. So the remaining $300 million USD was paid down on June 30 through the sale of another non-strategic, non-mining business which was the XXX company in Tennessee known as the American Limestone Company which we sold for $220 million USD. The additional $1 hundred million dollars we reduced a couple of weeks back through the sale or modernization of some put options that were part of Grupo Mexico shares that gave us $70 million USD and the remaining $30 million USD from another smaller source such as sales. So by the middle of this month we completely eliminated by 100% that $817 million USD acquisition facility. That puts us in that loan the leverage that it had prior to acquisition, plus the fact that it is now possible to generate cash flow, so these two things put the entire company in healthy position. We borrowed the commodity downslip and we can certainly pay interest and continue with our capital expenditures in the next few years even under low commodity prices.
Coming back to Mexico, what are the main challenges mining companies are facing in the light of the shortage of electricity, how do you see the government's efforts to allow private investments to flow into the energy sector , do you think they've been bold enough or need to go further?
I think they have been bold enough and they will continue to be so in the energy sector when it will be fully opened by next year. That's what we expect. We also expect heavy investment from various companies, including ourselves. It's no secret that we have been talking about the idea of building a Greenfield facility somewhere in Northern Mexico to provide energy for our own facility. Up to date, we are the second largest private consumer of energy in the country. Now of course with the ASARCO acquisition, if we were to add our own Texas properties we would be the largest consumer. That, of course, including the USA. We are looking forward to the sector opening up. Let me add that among the ten points that were handed to the Fox government from the private sector, that is the Consejo Coordinador Empresarial, one of those points was the opening of the energy sector even further to incentive the private investment. So I think this is going to happen. I think Mr. Fox will be bold.
Another Mexican mining company, Peñoles, is already building its own power generation facility. Are you seeking any joint venture with a technological partner that would have the know how to operate these sort of facilities?
We are not looking for joint ventures with a financial
partner, but certainly with operators, somebody
else who knows how to operate or somebody that knows
how to handle or build these facilities, but we
would own the majority of this venture. We would
not accept minority ownership, so we want to keep
the upside with our shareholders. |
Railroads is Grupo Mexico's second business, being mining the company's first bread-earner. Why did you decide to move into transportation? What are the synergies you saw between both businesses?
That's a very good question. We did not buy the railroad because there was significant synergies between that and mining. We bought the railroads for a few reasons, and let me take a step back. Back in '96, '97 and '98, Mr. Larrea noticed that copper commodities prices were coming down very fast. So he wanted something to mitigate the prices coming down so fast of the commodities. So we decided to take a look at ourselves and see what we knew how to do very well, so that we could apply it to another business. Why did we pick railroads? First of all, railroads and mining have similarities we know how to do. We have been very successful in mining in negotiating collective bargaining agreements and aligning the incentives in this sort of properties, so we were able to reduce the number of workers from over 22 thousand to about 8 thousand today, in less than two years and we haven't had any problems with the labor unions or employees. Point number 2, both mining and railroads are high fixed cost capital-intensive businesses, where logistics and the capacity utilization is the name of the game. We took this experience to the railroad and we were very successful as well. We are also very good at purchasing materials in the US, importing that into Mexico, central warehouses and how we manage those warehouses in terms of parts locomotives and you name it, and that is also true for the railroad. Finally if you take a look at the operative system of locomotives, it's very much the same as truck in a mine, they're electro-diesel. So we were are able to send pass forces into the railroad operations and increased the availability of equipment almost immediately. So these are the experiences that we knew how to do very well strategically. We took them over there, applied them and have been successful. Under the government, it was rather low if not negative and today we are generating from $172 million USD to $180 this year in terms of expectations. So you can see that's a good turnaround, and also if you look at this railroad acquisition it was sort of a dress rehearsal for us in terms of buying a huge operation, turning it around and doing the right things .
We knew how to handle the ASARCO acquisition and it wouldn't be a surprise to learn that the Chief Operating Officer and President of ASARCO today was the COO of our railroad division.
Could give us a description of some of the main railroad facilities you are currently operating?
The railroad constitutes about 10,400 km of tracks. It covers about 90% of the commercial and industrial are. We cover 4 major ports along the Pacific region and 2 in the Golf Region. The Ports are Guaymas, Portolobampo, Manzanillo and Altamira, which expands to 2 small ports in that area. We also cover 6 border points including Nogales, Naco, Aguaprieta, Ojinaga, Piedras Negras and a couple of others that are relatively smaller. So we have a railroad that not only serves the entire Mexico area but also brings traffic in from Asia and take it to the USA and vice versa. What we are developing today, and hope to do, is continue to consolidate ports and warehouse facilities were we already have connections and develop them to bring in traffic from Asia into Texas and that area for the distance between our port facility, for instance, Topolovampo and the Dallas area is shorter than the distance between Long Beach and that same area. In the future we hope to start competing once we acquire port facilities and warehouses and develop those.
Those are the long term plans. Today we have plenty of growth potential simply from regaining the market share that railroads lost in the past. We have had double-digit growth every single year since we acquired this infrastructure and will continue growing in the next few years.
In fact we recently interviewed Mr. Calvillo at TMM. They are currently operating the port of Manzanillo, besides having their own railroad system. Can we see a collision of interests in this?
That's an important point that you mention. But let me give you some light over here. Essentially, the TMM railroad and our railroad don't really compete. We are more complementary than anything else, simply because they own the Manzanillo port and they cannot access it unless through our railroads and we cannot access the other side of the country without them. So we are working together and we have a lot of traffic that goes through their railroads and a lot of theirs goes through our rails. Our main competitor is the truck. That is what we have to compete against and that is were we have to gain the market share that we lost in the past.
TMM told us they are already challenging the trucking business as they are much more time efficient than before the privatization. Is it also your case?
This is relatively true. We inherited a railroad with relatively obsolete infrastructure. We invested only last year in excess of $250 million USD. We purchased only in new locomotives 150 million dollars worth, 50 new General Electric locomotives. The rest went into the modernization of the infrastructure, communication systems, developing ports, border points, you name it. So this, of course, has helped us make the railroad much more efficient than before the acquisition, and little by little we start gaining market share.
When I say little by little, let me point out a couple of facts. The railroads in Mexico used to have 38% of the total freight transportation in Mexico. When we acquired these, our sector had around 12.5%, right now we have close to 14%, but if we compare this figure to the USA and Canada they have about 42% market share. Europe has about 80%. So you can see we don't really have to grow the pie. All we have to do is continue to make this more efficient, bring back the clients that we lost in the past back on the train and that's going to provide the double-digit growth we ask for. The potential here is enormous, both for TFM and for us, for all railroad traffic in Mexico.
For the trade between Asia and Mexico, not only for the domestic market, but also as a gateway to North America, in the context of the NAFTA agreement, and also to Central and South America, the Port of Manzanillo and other ports along the Pacific coast are meant to play a very important role. What do you expect from the increasing interest Asian companies are showing in Mexico?
What you say is precisely true. Simply, right now, the limitation is the infrastructure that we have. We don't have the facilities that can handle enough traffic, such as the ports of Long Beach that are just huge facilities. We need to continue to invest in these areas. We want to buy warehouses and port facilities to have the correct infrastructure so we can bring in huge amounts of traffic from Europe, Asia, mostly from Asia, and bring it up to Southern USA and even the Northern USA. The limitation here is how fast we can invest and get the infrastructure that we need to handle that amount of traffic.
What are the main Asian markets you are currently targeting for your transportation business?
Japan, Korea, but the most important one is Japan, simply because of the amount of vehicles and the amount of electrical products such as computers that are being brought due to maquiladora or because of the local component needs in Mexico. A lot of that is coming in through the Manzanillo port. So Japan is currently the most important, but certainly in the future Taiwan, China will continue to be a strong competitor in terms of textile, etc. There is plenty of potential from Asia. It is growing very fast and they are an export platform and we can take advantage of that.
This market has a tremendous potential, but so far how successful has Grupo Mexico been in penetrating those markets?
In the past, on the mining side, we have always had a relationship with Asia although minimal due to the proximity of the USA, were we have sold most of our copper silver and zinc production. We also sell a significant amount of merchandise to the European market. Now with the railroads, the relationship is mostly internal with the local automobile companies, such as Ford, General Motors, VW, etc, and also the agriculture sector in Mexico which we service significantly through our infrastructure. That's the Sonora region, the Valle del Yaqui, you name it. Right now the domestic market and the US market is the most important. Going towards the future, we can develop the Asian market as well.
As you mentioned, you also have an interest in the European market. What do you expect from the free trade agreement that has been signed recently and what would be the role of the ports you reach in the Atlantic coast?
As tariffs come down and more equipment begins to be imported from Europe into Mexico, the port facilities will be a mayor point of traffic for that merchandise. On the mining sector, we can also import cheaper equipment in terms of technology for our smelters or refineries, etc. We can also export a larger amount of metals than we exported in the past or the same significant amount without tariffs to the European market, especially zinc, which is a high requirement in that market.
So we see a good potential, not only for the transportation sector but also for the mining sector.
Before the interview, we talked about the political climate in Mexico. I would like your assessment regarding this peaceful transition period the country is going through and what do you think will be the implications of this process in the economy of the country?
I think the repercussions for the country in terms of economy have already been very positive. You saw the peso strengthen, you saw interest rates come down, capital inflows almost immediately, as soon as people realized we are now a mature democracy. Going forward, the Fox government has proven at least theoretically, that they are very business friendly, that they are open-minded. They have even proposed a common market with the United States and Canada. All of these things are a great idea to continue to integrate with the world markets and continue to advance in terms of economic growth in Mexico.
In addition, I think the Zedillo government deserves significant credit because the platform from which Fox's government is going to take off is very healthy. Today we probably have the healthiest economy in Latin America. We have very strong central bank reserves and we are very well positioned for growth. This is going to help us get investment grade, probably for SMP. We already have the investment rate from UDIS. We have seen the cost of capital come down significantly, this has helped business spur financing and growth. I think we will become more and more integrated with the world as we go along.
Could you tell us about your professional background and how do you see yourself growing in Grupo Mexico?
I was born in Cananea, where we have our mayor mine and deposit. I lived there 'till I was 15-16 years old. I attended military school in the United States. I did a couple of degrees at the University of Arizona, my MBA in finance at the University of Chicago and a degree in economics and political philosophy at Oxford University, England. After that, I worked for McKensee & Co., a reputable consulting firm, for four years. And then I ended up with Grupo Mexico particularly because of the Chairman's plan to expand outside of Mexico.
The way I see myself in this company is very simple. The company is growing very fast. Don't think we have stopped here, we will continue to grow. We have a very well defined and focused strategy going forward. I see myself growing with this company and I do see myself still involved in 10, 15, 20 years from now. |
Grupo Mexico 