Post on 10-Feb-2018
1
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro VerdeNovember 29, 2008
November 29, 2008
SOCIEDAD MINERA CERRO VERDE S.A.A.SMCVFollow-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).
General profile of the companyLocation: Arequipa, PeruIndustry: 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: Investment Research Manager:Laura Carrero Eduardo Courtlicarrerog@pucp.edu.pe ecourt@pucp.edu.pe Eduardo Contreras jecontreras@pucp.edu.pe Advisor:Johnny Rodríguez Miguel Panezjlrodriguez@pucp.edu.pe mpanez@pucp.edu.pe
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.
($ millions)
($ millions)
2
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde November 29, 2008
Figure 1. Share Price Performance ($ per share).Note: From Reuters
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.
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).
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
INVESTMENT THESIS
VALUATION
ANALYSIS OF THE INDUSTRY
STOCK SHARE PRICE PERFORMANCE
3
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro VerdeNovember 29, 2008
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.
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.
DESCRIPTION OF THE COMPANY
4
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde November 29, 2008
Table 2. SWOT Analysis
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
The shareholding structure of Sociedad Minera Cerro Verde SAA is as follows:
Table 3. Shareholder Participation
Shareholders Nationality PercentageCyprus Climax Metals Company North American 53.56%SMM Cerro Verde Netherlands B.V. Holland 21%Compañía de Minas Buenaventura S.A.A.
Peruvian 18.50%
Others* 6.94%Total 100%
* Workers and other people 4945Note: 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:
SHAREHOLDERS ANALYSIS
STRENGTHSEasier access to capital• High operating profit and net• Low level of leverage •
WEAKNESSAbsence of political coverage • (hedge)Unions organized•
OPPORTUNITIESNew findings from sites.• High demand for copper worldwide•
THREATSVolatility of copper prices.• Appearance of conflict with the • population and local governments.Changes in existing legislation•
5
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro VerdeNovember 29, 2008
Table 4. Managers of Shareholder’s Companies
CEO Representation Alternative CEOJohn Broderick (*)Harry M. CongerJorge Riquelme Bravo
Freeport-McMoRan Americas Jeffrey James MonteithDavid Naccarati
Ichiro Abe Sumitomo Metal Mining Co., LTD.
Kiyoshi KawasakiMasakazu Kobayashi
Raúl Benavides Ganoza
Compañía de Minas Buenaventura S.A.A.
Roque Benavides GanozaCarlos 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. Table 5. Principal Officials of Management
Executive members Position heldJohn Brack President General ManagerJeffrey James Monteith Operation General ManagerJames Banning ControllerCésar Linares Flores Accounting managerJulia Torreblanca Marmanillo 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. 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
ANALYSIS OF MANAGEMENT
ANALYSIS OF COMPETITION
6
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde 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 Share Market (%)Southern Copper Corporation 30.2Antamina 28.7Cerro Verde 23.0Xstrata Tintaya 10.0Compañía Minera Milpo S.A. 0.19Sociedad Minera el Brocal 0.18Sociedad Minera Corona 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
7
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro VerdeNovember 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.
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
Note: From the Comisión Nacional Supervisora de Empresas y Valores del Perú
FINANCIAL SUMMARY
PERIOD2004 2005 2006 2007 IQ08 IIQ08 IIIQ08
Total Revenues
260,782 358,928 667,671 1,794,559 711,352 687,140 411,289
Cost of Revenues
119,482 133,715 140,423 418,108 127,237 154,171 144,428
Operating Expenditures
1,089 1,295 3,538 54,405 18,782 18,849 22,433
Net Income 87,663 234,663 444,621 804,685 352,067 301,325 165,456
8
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde 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 RevenuesNote: From the Comisión Nacional Supervisora de Empresas y Valores del Perú
Table 10: Liquidity per Year of Cerro Verde
Note: From the Comisión Nacional Supervisora de Empresas y Valores del Perú
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.
ANALYSIS OF RISK
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 4.12Working Capital 138.2 352.1 362.9 525 676
9
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro VerdeNovember 29, 2008
Tabl
e 11
: Bal
ance
She
et P
rojec
ted
10
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde November 29, 2008
Table 12: Income Statement Projected
11
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro VerdeNovember 29, 2008
12
FINANCIAL REPORTS CENTRUM Católica - Burkenroad Latin America (Peru) - Sociedad Minera Cerro Verde November 29, 2008
Ph.D. Eduardo Court Monteverdeecourt@pucp.edu.peResearch Director Burkenroad Peru ReportsCENTRUM - Business School of the Pontificia Universidad Católica del PerúPhone Nº: (511) 313 3400, ext 7019
Magister Miguel Panezmpanez@pucp.edu.peCoordinatorBurkenroad Peru ReportsCENTRUM - Business School of the Pontificia Universidad Católica del PerúPhone Nº: (511) 313 3400
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/