SOCIEDAD MINERA CERRO VERDE S.A.A.

Transcription

November 29, 2008
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde
November 29, 2008
SOCIEDAD MINERA
CERRO VERDE S.A.A.
SMCV
Follow-up coverage: Investment constant. It has shown more market share.
Investment Recommendation: Moderate, because of the price fluctuations.
Price: US$ 10.30 (NPE 31.40)
IPC: 121.67
IGBVL: 7425.98
• The selling price of copper is quoted on the market of the London Metal
Exchange (London Metal Exchange) and the New York Commodity Exchange
(COMEX).
• The target price is US$ 10.30 by share (NPE 31.40).
($ millions)
($ millions)
General profile of the company
Location: Arequipa, Peru
Industry: Mining
Description: Company that operates mine sites up to the refining of minerals
and metals.
Products and services: running as the main product of copper, gold, zinc, lead,
molybdenum, refined silver, iron and tin.
Analysts:
Laura Carrero
[email protected] Eduardo Contreras
[email protected] Johnny Rodríguez
[email protected] Investment Research Manager:
Eduardo Court
[email protected]
Advisor:
Miguel Panez
[email protected]
The BURKENROAD REPORTS PERÚ are produced solely as a part of an educational program of
Tulane University’s A.B. Freeman School of Business in conjunction with CENTRUM Católica School
of Business. The reports are not investment advice and you should not and may not rely on them in
making any investment decision. You should consult an investment professional and/or conduct your
own primary research regarding any potential investment.
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November 29, 2008
STOCK SHARE PRICE
PERFORMANCE
Figure 1. Share Price Performance ($ per share).
Note: From Reuters
INVESTMENT
THESIS
Cerro Verde mine has 23% of the exploitation of copper in Peru, the third after
Southern and Antamina. The high demand for copper in 2007 led Cerro Verde
to invest $ 100 million in various capital expenditures to expand its plant, of
which $ 55.3 million were directed to the project of primary sulphides. The
expansion was a major total cost of $ 900 million. The benefits of expansion
were with the high increase in production during the project, which reached
269,537 tons of copper in 2007, and the variation of prices in the international
market. The gains came when Cerro Verde grew 61.9% in the fourth quarter
of 2007.
The financial position is underpinned by a strong operating leverage of 0.37
in 2007, a small indicator compared to other large mining companies. Also,
returns from 2007 to first quarter of 2008 increased from 60% to 82.5%, which
allows good liquidity and low capital requirements.
It is important to mention that as a result of the global financial crisis, copper
prices for the Latin American region have fallen by 30% on average in the past
three months.
VALUATION
We have chosen the discounted cash flow (DCF) method because this is the
representative method for valuing this company. The price obtained using this
method was PEN 31.40, or US$ 10.30 per share.
The Cerro Verde’s cash flows are affected by risks. For this reason, it should be
discounted at the appropriate rate risk, the Weighted Average Cost of Capital
(WACC).
ANALYSIS OF
THE INDUSTRY
Peru is a country rich in minerals, being the world’s leading producer of silver,
third in copper and zinc, and fifth gold. Currently, the mining industry is one
of the most important sectors in the country, since it is responsible for more
than half of its exports. Global demand for copper rose 3.31% compared to
2006; therefore, the company’s main strategy is to continue investing to extract
a higher volume of ore and to expand their deposits for the future. It currently
has two main projects: the development of the Tagus Black Hill that would
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allow the company to continue with their activities; leaching, as well as the
exploitation of the deposit which sapped Santa Rosa, is planned for 2011.
Table 1: Peru’s Macroeconomic Factors
Note: Retrieved from www. Minem.gob.pe
Different markets require a large amount of minerals (raw material), the same
as they are acquired by the industries that provide value-added products.
As for the price of minerals, these are governed by the international market;
however, it is known that mining companies belong to a few big multinationals
that have some influence on the price of these minerals.
In recent years, there is a strong tendency from buyers to use recycled metals.
Currently, there are substitutes for some minerals, as is the case of fiber optics,
as well as the use of wireless, instead of copper cables. However, the demand
for this metal is still high, especially for infrastructure construction projects.
Because the company only provides raw materials to their customers, there is
no brand identity and differentiation (commodities). The emergence of new
projects means that the pace of growth of the industry is positive, not creating
any kind of rivalry between the mining companies.
DESCRIPTION OF
THE COMPANY
SMCV is a company whose copper extraction operations in Peru began in
1968, when the copper was shipped to Wales for the recovery of metals. This
company is located in Asiento Minero Cerro Verde, S/N Uchumayo, Arequipa;
its mining sites are southwest of the city. SMCV began trading on the Stock
Exchange in Lima on November 14, 2001. The main suppliers of mining are
Intec Peru, and Ferreyros Sandvik Mining and Construction.
The unit operations conducted for the extraction of material consists in four
steps: drilling, blasting, loading and hauling. The copper minerals can be
presented as oxides or sulphides; each of them is treated through different
metallurgical process.
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November 29, 2008
Table 2. SWOT Analysis
STRENGTHS
• Easier access to capital
• High operating profit and net
• Low level of leverage
OPPORTUNITIES
• New findings from sites.
• High demand for copper worldwide
WEAKNESS
• Absence of political coverage
(hedge)
• Unions organized
THREATS
• Volatility of copper prices.
• Appearance of conflict with the
population and local governments.
• Changes in existing legislation
Among their strategies, the company has a vision of growth and expansion
of its operations. That is why it is planning the project sulfide primary Cerro
Verde. This project is a macro-expansion of the Minera Cerro Verde, which
aims to achieve three times the current production of copper.
In 2007, Cerro Verde invested $100 million in various capital expenditures;
$55.3 million dollars were invested in the project of primary sulphides. The
expansion meant a major total investment of $900 million. The benefits of
expansion were with the high increase in production during the project, which
reached 269,537 tons of copper in 2007
SHAREHOLDERS
ANALYSIS
The shareholding structure of Sociedad Minera Cerro Verde SAA is as
follows:
Table 3. Shareholder Participation
Shareholders
Cyprus Climax Metals Company
SMM Cerro Verde Netherlands B.V.
Compañía de Minas Buenaventura
S.A.A.
Others*
Total
Nationality
North American
Holland
Peruvian
Percentage
53.56%
21%
18.50%
6.94%
100%
* Workers and other people 4945
Note: From the SMVC Memory 2007
Each of the parent companies has policies for training its officers, through
which they provide a line of career and prepare them for future managerial
categories.
Until late last year, the Board of Directors of Cerro Verde was composed as
follows:
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Table 4. Managers of Shareholder’s Companies
CEO
Representation
Alternative CEO
John Broderick (*)
Harry M. Conger
Jorge Riquelme
Bravo
Ichiro Abe
Freeport-McMoRan Americas
Jeffrey James Monteith
David Naccarati
Sumitomo Metal Mining Co.,
LTD.
Kiyoshi Kawasaki
Masakazu Kobayashi
Raúl Benavides
Ganoza
Compañía de Minas
Buenaventura S.A.A.
Roque Benavides
Ganoza
Carlos Gálvez Pinillos
(*) Mr. John Broderick, who served as President General Manager, worked until November
12, 2007, and was replaced by Mr. John Brack.
Note: From SMCV Annual Report 2007.
Cerro Verde has a long-term contract that will govern, with the company
Sumitomo Metal Mining of Japan, until 2016, with whom it has committed to
sell up to 50% of its entire annual production of copper. This company has also
annual contracts, which can be renewed automatically.
ANALYSIS OF
MANAGEMENT
Table 5. Principal Officials of Management
Executive members
Position held
John Brack
Jeffrey James Monteith
James Banning
César Linares Flores
Julia Torreblanca Marmanillo
President General Manager
Operation General Manager
Controller
Accounting manager
Legal manager
Note: From SMCV Annual Report 2007
There is no link of consanguinity or affinity between members of the Directory
and members of management; there is no conflict of interests among relatives.
Raul Benavides Ganoza (Director Holder) and Roque Benavides Ganoza
(Alternate Director) have a second degree of consanguinity.
ANALYSIS OF
COMPETITION
Southern Peru (SP) is a company with a foreign capital majority. Its
shareholders are Asarco Inc. (54.1%), a subsidiary of The Marmon Corp.
(14.2%); Phelps Dodge Overseas Capital Corp. (14%); and common shareholders
(17.7%). SP is located in the departments of Moquegua and Tacna, and in
southern Colombia. SP produces concentrate, blister and refined copper, and
is the largest producer in Peru. It also produces, among others, concentrate of
molybdenum, zinc concentrate, and refined zinc, silver and gold.
Milpo is dedicated to the production of zinc, copper, lead, silver and gold. It
has the El Porvenir mine, located in Cerro de Pasco, Ivan Refinery and Mina,
Mina Chapi and Mina Cerro Lindo. The amount of imports for the year 2005
was 1.3 billion dollars, and its exports amounted to $ 65 million.
Sociedad Minera El Brocal focuses on the extraction and concentration of
polymetallic ores, mainly zinc (with a production of approximately 100,000
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November 29, 2008
tons / year), lead (30,000 tons / year), and silver. Over the past 50 years, this
company has grown among the medium largest mining companies in Peru.
They own Colquijirca mine and the concentrating plant Huaraucaca. However,
it is not a major competitor for Cerro Verde, and its participation in the domestic
market is unable to be higher than 0.2%.
Sociedad Minera Corona S.A. is responsible for the exploration, extraction,
processing and sale of concentrates of lead, copper, silver, zinc, among others.
In the same way, it is responsible for marketing electricity.
Compañía Minera Condestable is the first state-owned copper company
privatized in Peru (1992). Its daily production is about 4200 metric tons of
processed ore. It has a concentrating plant and a leaching plant.
Table 6: Peruvian Share Market on Copper Production
Company
Southern Copper Corporation
Antamina
Cerro Verde
Xstrata Tintaya
Compañía Minera Milpo S.A.
Sociedad Minera el Brocal
Sociedad Minera Corona
Share Market (%)
30.2
28.7
23.0
10.0
0.19
0.18
0.17
Note: From Reuters
Afterwards, the ROIC ratio is shown in the Table 7, which allows Cerro Verde to
measure the performance of its management, both from the company analyzed
as the main competitors:
Table 7. Summary Indicators
Note: From the Ministerio de Energía y Minas del Perú
Table 8. Indicators Compared with the Competition
* Market Cap. in S/. From September 30th, 2008.
Note: From the Lima Stock Exchange
The main competitor of Cerro Verde is Southern Peru, for the largest volume
of exports it produces and by the greater diversity of metals exports. Its most
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November 29, 2008
important product is copper. The company has a good performance based on
the investment of its assets, and has the highest market capitalization. However,
in future metal, prices can vary significantly.
The management of Cerro Verde is acceptable, with investments leading to
higher profits, and a capital structure without much risk in accordance with
the policy it maintains. In general, the company has a high market value and
returns for shareholders, greater than the average of major Peruvian mining
sector
Cerro Verde has the largest market capitalization. The value of its operating
earnings was 1.18 times the value of their stock shares in books. The debt-equity
ratio shows a ratio 0.11. As for the profitability of the business and shareholder,
Cerro Verde is below the average of its competitors. The price of value of the
stock share between the price of book value is in the middle of the average of
competitors.
FINANCIAL
SUMMARY
The Cerro Verde’s financial debt amounted to US $ 78.8 million. It consisted of
the issuance of corporate bonds, which was posted on April 26, 2006, for a total
of US $ 90.0 million, at an annual interest rate of Libor + 1.6%.
It is worth mentioning that for purposes of presentation, US $ 5.0 billion of
long-term debt are deducted in the balance sheet, which correspond to the
costs incurred in the issuance of the bonds, and they will be written off at the
time of application of the bonds.
The ratio of financial leverage (total debt / EBITDA), to December 2007, was
0.05x; it means that if Cerro Verde could dispose of its entire EBITDA to cancel
its debt, it could make it in less than a month.
In August 2006, Cerro Verde signed an agreement with the Committee of
Struggle for the Defense of the Interests of Arequipa (The Committee), where
the company pledge to build a water treatment plant and a sewage plant. This
agreement stipulates that the cost of construction of the first will be paid by
Cerro Verde, and the second by the province of Arequipa. If there was any
difference between the cost of both plants, there will be compensation to ensure
that 50% of the costs of both works is owned by each party.
Thus, the Company estimates that the cost of the deal will be approximately
U.S. $ 40.0 million, which has been recognized as liabilities and in the profit
and loss statement of 2006.
Table 9. Earnings per Year
Total
Revenues
Cost of
Revenues
Operating
Expenditures
Net Income
2004
260,782
2005
358,928
2006
667,671
PERIOD
2007
1,794,559
IQ08
711,352
IIQ08
687,140
IIIQ08
411,289
119,482
133,715
140,423
418,108
127,237
154,171
144,428
1,089
1,295
3,538
54,405
18,782
18,849
22,433
87,663
234,663
444,621
804,685
352,067
301,325
165,456
Note: From the Comisión Nacional Supervisora de Empresas y Valores del Perú
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ANALYSIS OF
RISK
November 29, 2008
Operating risks: The Company’s activities are regulated by the General
Mining Act and they include the extraction, production and marketing of
copper cathodes and anodes. Part of the operational policy of Cerro Verde is
the protection of the environment, with a commitment to pollution prevention,
compliance with environmental regulations and cooperation with the
surroundings. In that context, in 2002, the company has achieved ISO 14001
certification pledging to meet domestic environmental laws.
Cerro Verde is a company that at the end of the year 2007 has had an operating
leverage of 0.37, indicator reduced compared to other large mining companies.
Returns from 2007 to first quarter of 2008 have increased from 60% to 82.5%;
this means SMCV has a good liquidity and low capital requirements.
Financial risks: Cerro Verde presents variable liquidity levels, and broad levels
of generating profits, with an EBITDA of U.S. $ 1363.7 million in the year 2007.
The financial leverage (total debt / EBITDA) is 0.05 times, which means that
for the full of the EBITDA, Cerro Verde could meet all its financial obligations
in small periods as they have a high operating and net profitability. This is
true to all the mining industry, particularly for copper, as its value has been
appreciated worldwide. The liquidity levels of Cerro Verde and the evolution
of revenues per year may be seen in the following figure and table:
Figure 2. Evolution of Cerro Verde’s Revenues
Table 10: Liquidity per Year of Cerro Verde
Liquidity
2004
2005
2006
2007
2008E
Current Ratio (times)
3.55
10.51
3.21
2.29
5.14
Quick Ratio (times)
3.08
8.83
2.72
2.05
4.12
Working Capital
138.2
352.1
362.9
525
676
Regulatory risks. In Peru, the mining industry is regulated mainly by the
General Mining Law, and other standards such as the care of the environment
and a holding company with social responsibility. In this sense, the mining
sector seeks ISO 14001 certifications to continue operations within the legal
framework.
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Table 11: Balance Sheet Projected
November 29, 2008
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Table 12: Income Statement Projected
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November 29, 2008
November 29, 2008
11
The Burkenroad Reports are about listed companies´ financial analysis,
and small and medium Peruvian companies. They are made by CENTRUM
Catolica´s alumni, the Pontificia Universidad Catolica del Peru Business School,
and are they supervised by Finances, Economy and Accounting professors of
the School.
Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Instituto
de Estudios Superiores de Administración de Venezuela (IESA), Universidad
de los Andes de Colombia, Estudios Superiores Incolta de Colombia (ICESI),
Escuela de Postgrado de Administración de Empresas de Ecuador (ESPAE),
and the Universidad Francisco Marroquín de Guatemala joined with Tulane
University, develop the Burkenroad Program in Latin America. This project
is supported by the Multilateral Investment Fund from the Inter-American
Development Bank.
This program enriched the human capital by providing training in financial
analysis techniques, and also pretends to facilitate access to sources by
providing to financial institutions and investors with information.
These reports evaluate conditions and opportunities for investments in
companies. The listed companies´ reports are distribuited to domestic and
foreign investors by using publications and information systems as the Infosel
Financiero and Finsat. The small and medium companies’ reports are solely
distributed to this kind of companies to be shown to financial institutions
or potential investors in future private presentations. Investment plans and
situation from the analyzed companies are shown in an Annual Meeting.
Additional information about Burkenroad Program, please visit the page web:
http://www.centrum.pucp.edu.pe/es/programaburkenroad/
Ph.D. Eduardo Court Monteverde
[email protected]
Research Director
Burkenroad Peru Reports
CENTRUM - Business School of the
Pontificia Universidad Católica del Perú
Phone Nº: (511) 313 3400, ext 7019
Magister Miguel Panez
[email protected]
Coordinator
Burkenroad Peru Reports
CENTRUM - Business School of the
Pontificia Universidad Católica del Perú
Phone Nº: (511) 313 3400
12
November 29, 2008

SOCIEDAD MINERA CERRO VERDE S.A.A.

Transcription

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