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Rating Action:

Moody's assigns Baa2 rating to Minera Mexico's proposed notes

19 Sep 2019

New York, September 19, 2019 -- Moody's Investors Service ("Moody's") assigned a Baa2 rating to the proposed senior unsecured notes to be issued by Minera Mexico, S.A. de C.V. ("Minera Mexico"), a wholly owned subsidiary of Southern Copper Corporation ("Southern Copper"). The Baa2 senior unsecured ratings of the notes issued by Southern Copper Corporation and Minera Mexico remain unchanged. The outlook is positive.

Proceeds will be used for capital expenditures in Mexico, including the Pilares copper project and Buenavista zinc expansion, and other general corporate purposes. Still, the transaction will have no material effect on Southern Copper's leverage. Assuming a $1 billion debt issuance, Southern Copper's pro-forma gross leverage (total adjusted debt/EBITDA) in the 12 months ending in June 2019 would increase from 2x to 2.3x.

The rating of the notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.

Rating assigned:

..Issuer: Minera Mexico, S.A. de C.V.

Proposed Senior Unsecured Notes: Baa2

RATINGS RATIONALE

Minera Mexico's Baa2 senior unsecured rating is closely correlated to Southern Copper's ratings. Any changes in financial policy with respect to Minera Mexico and its debt or liquidity profile or as a result of legal or regulatory changes in Mexico will continue to be key factors in evaluating Minera Mexico's rating.

Southern Copper's Baa2 ratings reflect the company's solid credit metrics, very competitive cost position, improving production profile and adequate liquidity. The company's significant copper reserves compared with its peers; portfolio of low-cost, long-life productive copper assets; geographic diversification, with operations split fairly evenly between Mexico and Peru, and continued investments for growth are also positive rating considerations. In addition, given Southern Copper's competitive and improving net cash cost position, we expect the company to continue to achieve good earnings and operating cash flows, notwithstanding the volatility in copper prices.

The ratings are constrained by the lack of product diversification - majority of revenues come from copper sales - and the negative free cash flow in periods of low copper prices, mostly as a result of largest capital expenditures required for growth.

The proposed transaction will support the company's project portfolio in Mexico, which includes the Buenavista zinc project (total capital expenditures of $413 million) and the Pilares project (total capital expenditures of $159 million), as well as the San Martin mine, which will resume operations after a 11-year strike. In addition, Southern Copper has two projects waiting for Board approval -- El Arco and El Pilar.

The Pilares project consists of an open-pit mine operation located 6 kilometers away from La Caridad, with an annual production capacity of 35,000 metric tons of copper in concentrates. This project will significantly improve the overall mineral ore grade (0.78% expected from Pilares versus 0.34% from La Caridad), with a planned start-up in early 2020. The major project underway in Mexico is the Buenavista zinc project, which will add 20,000 metric tons of copper and 80,000 metric tons of zinc after its completion in 2021.

Southern Copper has planned capital expenditures of about $10 billion from 2019 through 2022, targeting an increase in annual copper production to 1.1 million tons in 2022 -- and 1.8 million tons in 2026 -- from 885,000 tons in 2018. With copper prices trading towards $2.5/lb, projects in the pipeline can be mostly funded with cash flow from current operations, but the company may need to rely on debt as well. As of June 30, 2019, Southern Copper had cash and short-term investments of $871 million, and generated $1.9 billion in cash from operations in the 12 months ended June 2019.

The positive outlook reflects Southern Copper's strong positioning within the Baa2 rating category and our belief that its credit metrics will be sustained at adequate levels in the next 12-18 months. In addition, given Southern Copper's competitive and improving net cash cost position, we expect the company to continue to achieve good earnings and operating cash flow, notwithstanding the volatility in copper prices.

The ratings could be upgraded if Southern Copper is able to execute its large expansion plans and enhance its production profile. Moreover, an upgrade would depend on the company maintaining its competitive cost position and on its ability to execute its growth projects on schedule and within budget. Any possible upward movement would also be also dependent on the company's dividend payout relative to its growth investments and liquidity requirements. Quantitatively, an upgrade would also require adjusted gross debt to EBITDA below 2x and ; EBIT to interest expense above 6x on a sustained basis; as well as EBIT margins of at least 13%; and operating cash flow minus dividends to total debt above 35%.

The ratings could suffer negative pressure should conditions in the copper markets deteriorate, leading to lower profitability. Downward rating pressure could also occur if the company is unable to implement its capital spending program without increasing its debt levels. A marked deterioration in the company's liquidity position, or increased shareholder distribution or share buybacks, or both, could also precipitate a downgrade. Quantitatively, a rating downgrade would also require the following factors: EBIT margins falling to levels below 10%; adjusted gross debt to EBITDA trending to 3x (or above) on a sustained level; and dividend payouts such that cash from operations less dividends to gross debt remains below 30% for a prolonged period.

The principal methodology used in this rating was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Southern Copper Corporation, headquartered in Phoenix, Arizona, is 88.91% owned by Americas Mining Corporation (AMC), which in turn is 100% owned by Grupo Mexico S.A. de C.V. (Grupo Mexico). Minera Mexico, S.A. de C.V. is a wholly owned subsidiary of Southern Copper. Southern Copper operates through its registered branch in Peru and its Mexican subsidiary, Minera Mexico, S.A. de C.V., and the company's principal business is the production, smelting and refining of copper, which represented 86% of its total sales volumes in the first six months of 2019. Additionally, the company has relevant by-products, including molybdenum, silver, zinc and gold. The company's revenue for the last 12 months ended June 2019 totaled $7.0 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Barbara Mattos, CFA
Senior Vice President
Corporate Finance Group
Moody's America Latina Ltda.
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16th Floor, Room 1601
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Brazil
JOURNALISTS: 0 800 891 2518
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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