Grupo Mexico Goes From First to Worst on Chemical Spill

By Adam Williams

Spilling chemicals into two rivers near the U.S. border is making Grupo Mexico SAB (GMEXICOB) the country’s worst performing major stock.
The shares have lost 5.3 percent, the most among 35 companies on the benchmark IPC index, since an Aug. 6 copper sulfate solution spill at its Buenavista del Cobre mining operation that the company says contains the world’s largest copper reserves. In the preceding month, it led gains among the index’s materials stock to a 16-month high 49.24 pesos.
Mexican congressional commissions are asking for operations to be suspended and that the Economy Ministry consider canceling the mine’s concession. The country’s environmental prosecutor, known as Profepa, filed a criminal complaint against
the company. Metal content in the Sonora River remains above permissible consumption levels, Mexico’s water commission, known as Conagua, said Aug. 22.
“The shares have been falling and the noise around this case will continue until the water commission lifts the environmental alert,” Rodrigo Garcilazo, an analyst at Corporativo GBM, said in a phone interview from Mexico City. “If there is a temporary suspension of the plant, it could have a more long-term impact on Grupo Mexico than expected.”
Grupo Mexico doesn’t expect the mine operations to be suspended, Juan Pablo Becerra, the company’s head of investor relations, said by telephone from Mexico City yesterday. The company is working with the Environment Ministry and Conagua to reduce the rivers’ acidity levels, he said.

Production Forecast

“All the news that has come out obviously created volatility in the shares,” Becerra said. “Operations continue as normal and we expect to achieve our production guidance.”
The 40,000 cubic meters of copper sulfate solution that spilled into the rivers isn’t hazardous, Grupo Mexico’s Chief Financial Officer Daniel Muniz Quintanilla said in an Aug. 12 telephone interview. The company regrets the incident, which was a result of heavy rain in July and early August, according to an Aug. 20 e-mailed statement from Grupo Mexico.
Operations at Buenavista del Cobre have continued uninterrupted since the spill, according to Muniz. Grupo Mexico expects annual production at the mine to reach 510,000 tons by 2016 from about 200,000 tons now. The company’s copper output rose 6 percent to 204,823 tons in the second quarter as Buenavista started a new processing plant.
The permanent commission of both houses of Mexico’s Congress asked the Economy Ministry to cancel the mine’s concession. The commission requested on Aug. 20 that mine operations be suspended until damages are evaluated.

Political Pressure

Grupo Mexico probably will face more than “only minor sanctions” for the spill, President Enrique Pena Nieto said in televised interview on Aug. 19.
“The damage done to the population and environment is high,” he said, adding that fines will be determined by the Environment Ministry and the Attorney General’s Office.
Political pressure against Grupo Mexico began to mount last week after Environment Minister Juan Jose Guerra said the company’s claim that the chemical spill was caused by heavy rain is “totally false.”
“There were no rains that caused a spill of this nature,” he told reporters in Mexico City on Aug. 19. Aid pledged by Grupo Mexico to nearby residents was not delivered “within the time-line that they had offered,” he said.
Profepa filed a criminal complaint to the Attorney General’s Office on Aug. 18 that could carry a fine of as much as 40 million pesos ($3 million), according to Profepa.
The spill contaminated drinking water for communities located near the mine in Sonora state and resulted in the temporary closing of schools, according to Sonora’s civil protection agency.

Limited Impact

While “unfortunate,” the spill will have a limited financial impact on the company, according to an Aug. 20 Citigroup Inc. research note led by analyst Alexander Hacking. Monex Casa de Bolsa analyst Fernando Bolanos raised his recommendation on Grupo Mexico to buy from hold on speculation recent share declines will result in larger returns.
If the environmental alert is lifted by the government, “we would consider that the pressure on the shares would be reduced,” Bolanos said in an Aug. 22 research report.
Grupo Mexico’s shares have returned 8.6 percent this year, beating the index’s 7.4 percent average return.
Second-quarter net income rose 93 percent to $559 million, beating analysts’ estimates. Quarterly earnings before interest, taxes, depreciation and amortization, or Ebitda, increased to $1.02 billion from the year ago, of which $769 million came from the mining division.
The Buenavista del Cobre mine represents 26 percent of Ebitda for the company, Becerra said.

Closing Concerns

Grupo Mexico has 11 buy, seven hold and two sell recommendations from analysts surveyed by Bloomberg.
The stock decline could continue as long as Conagua maintains an environmental alert on contamination levels of the rivers, according to GBM’s Garcilazo. Water in the Sonora River contains arsenic, cadmium, copper, chrome and mercury, according to an Aug. 22 e-mailed statement from Conagua.
A temporary suspension of the entire Buenavista del Cobre complex would be “worrisome for our valuation” of Grupo Mexico’s shares, Garcilazo said. If the Economy Ministry steps in to evaluate the impact of the spill, the investigation could take as long as six months, he said.