Mexican Mining

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Grupo Mexico Hits Bottom After Spill: Corporate Mexico
By Nacha Cattan Oct 2, 2014 1:43 PM PT

http://www.bloomberg.com/news/2014-10-02/grupo-mexico-hits-bottom-after-spill-corporate-mexico.html?cmpid=yhoo

Grupo M (GMEXICOB.MX)

Grupo Mexico SAB (GMEXICOB) is the second-worst performer on Mexico’s benchmark index after toxic waste from one of its mines spilled into a river, leaving 22,000 farmers and villagers without clean water. That’s only helped increase bullish bets for the nation’s largest mining group.

The company controlled by billionaire German Larrea is poised to rebound after agreeing to pay $150 million to clean up chemicals dumped into the Bacanuchi River in August, analysts from firms including Invex Casa de Bolsa said. It will boost sales by expanding mines and investing in oil drilling since the government opened energy exploration to private companies.

“I would take this as a buying opportunity,” Invex’s Jose Antonio Cebeira said in a telephone interview from Mexico City. “Operations won’t have any problems. The worst has passed.”

Grupo Mexico’s revenue is projected to rise by 14 percent over the next two years, the third-biggest gain among 35 companies on the IPC index, according to data compiled by Bloomberg. Twelve analysts recommend buying the stock, up from nine before the Aug. 6 spill, according to Bloomberg data. Invex changed its rating Aug. 12 to strong buy.

The shares have plunged 11 percent since the day before the accident. The stock fell 1.3 percent to 43.78 pesos at close in Mexico City today.

Located in northern Mexico near the Arizona border, the Buenavista del Cobre mine has the world’s largest copper reserves, according to Grupo Mexico. The spill involved about 11 million gallons (42 million liters) of copper sulfate solution that seeped into nearby waterways, tainting irrigation ponds and running water.

Pipe Seals
After initially blaming the contamination on heavy rains that caused containment pools to overflow, Grupo Mexico later said in a statement to the Mexican stock exchange that faulty pipe seals triggered the discharge. The creation of a trust of 2 billion pesos ($149 million) will help reverse environmental damage and compensate residents in seven municipalities, according to a Sept. 11 company filing to the exchange.

“We’re doing the right thing,” Chief Financial Officer Daniel Muniz Quintanilla said yesterday said in a telephone interview. “There was an accident and we’re working to make sure this is 100 percent remedied.”

Hurricane Odile flooded the mine again six weeks after the accident, dispersing chemicals throughout soaked farms, though the government said very few new contaminants were released. Sonora state’s civil protection agency banned the use of irrigation wells or crops within 1,600 feet (488 meters) of the Sonora and Bacanuchi river banks.

Farmer Fallout
Residents along the rivers say they’re still recovering.

Hector Alvarado, a farmer and the rural development director in the village of Arizpe near the mine, lost his sorghum and peanut crops after river contaminants prevented him from watering his fields. He also couldn’t plant garlic this season, he said in an interview on his farm.

Luz Apodaca broke out in blisters after washing her face in the river two days after the greenish-blue heavy metals were released upstream, she said in an interview in her home. The 50-year-old, whose chin and cheek still showed light burns six weeks later, is suing for damages, saying her injuries have kept her from selling the foam flowers she creates for a living.

At least 19 people have registered gastrointestinal diseases or burns after coming into contact with the polluted waterway, according to a Sept. 19 government statement.

Pool Closings
Guillermo Haro, the nation’s environmental prosecutor, said in a Sept. 23 interview that to prevent another spill he has shut down two of the mine’s containment pools. The measure affects 800 hectares (1,980 acres) of the Buenavista mine’s 3,600 hectares, cutting output by about 20 percent, he said.

Grupo Mexico is also facing a lawsuit from the state civil protection agency, which says the company failed to submit a risk report and a construction permit before building a new administrative facility. Work has been suspended at the agency’s direction. A committee of lawmakers issued a report published Sept. 17 calling on Grupo Mexico to establish a 5 billion peso ($370 million) development fund for the Sonora region.

The company has cleaned 83 percent of the 220 kilometers (137 miles) of affected river and is prepared to pay whatever is necessary to repair the damage, CFO Muniz said.

Grupo Mexico said Sept. 4 it’s on track to produce 850,000 tons of copper this year and reach 1.34 million tons by 2017. However, Buenavista’s director of operations, Daniel Chavez, said at a press conference today that the mine will produce 10 percent less this year than originally expected following the chemical spill.

Mine Output
Grupo Mexico expects Buenavista’s annual output to reach 510,000 tons by 2016 from about 200,000 tons this year. The mine accounts for 22 percent of Grupo Mexico’s output, and the plan to boost production is one reason Monex Casa de Bolsa recommends buying the stock, according to analyst Fernando Bolanos.

Bolanos changed his rating to buy from hold on Aug. 22 after shares plummeted to levels he considered cheap, although he attributes most of the fall to copper price fluctuations and a smaller portion to the spill.

“There are various elements that are positive about Grupo Mexico,” Bolanos said in a phone interview from Mexico City. “The expectations for growth in the next few years, increases in exploitation volumes due to expansion projects at Buenavista, the incorporation of the Tia Maria project and the possibility of participating in the energy reform.”

Mexico broke a 75-year state monopoly on oil drilling in December with a constitutional amendment permitting private companies to produce oil and gas on their own.

Grupo Mexico has deep-water drilling experience and plans capital spending that will let sales thrive under the new energy law while its rail operations expand, Invex’s Cebeira said. He estimates sales will increase 7 percent next year and 9 percent in 2016 after growing 1.2 percent this year.

“I don’t see any problem here, not even in the operating schedule” due to the spill, Cebeira said. “It was more political noise because mines have always had spills in the past and the fines have been very small compared with the damage. So Grupo Mexico said, ‘I’ll pay the fine and apart from that I’ll repair damages.’”