Moody’s Shifts Southern Copper’s Outlook to Negative

Moody's Ratings has affirmed the Baa1 senior unsecured ratings for Southern Copper Corporation and its Mexican subsidiary, Minera Mexico, while revising the outlook for both entities from stable to negative. Moody’s associated a potential upward or downward rating to the rating for Mexico and Peru, where the company operates.

According to Moody’s, the rating reflects Southern Copper's operational stability, credit metrics, and conservative financial strategies. The company has maintained steady debt levels and strong liquidity, supported by its greenfield project pipeline. Southern Copper's substantial copper reserves, competitive cost structure, and robust liquidity position continue to support the rating. However, Moody's cited limited product and geographic diversification as a constraint, with the majority of revenue derived from copper sales. Additionally, political and regulatory challenges in Mexico present operational risks.

The shift to a negative outlook is linked to Moody's recent change in Mexico's sovereign rating outlook from stable to negative, highlighting the increasing risks of regulatory changes and potential government interference in the mining sector. Southern Copper’s Mexican Subsidiary Minera Mexico's operations remain closely tied to Southern Copper's ratings, given its substantial contribution to consolidated earnings, representing 57% of EBITDA and 59% of revenue in the last quarter, and its structural role within the group.

Southern Copper generates 41% of its revenue and 43% of its EBITDA from Peruvian operations, providing balance against risks in Mexico, Moody’s notes. The company is focusing on growth in Peru, with a project pipeline set to expand over the next two to five years. Key projects include Tia Maria, expected to produce 120,000t of copper annually, Los Chancas, with 98Mt of oxides and 52Mt of sulfides, and Michiquillay in Cajamarca, which has 2,288Mt of inferred copper resources, as reported by MBN.

According to Moody’s report, Southern Copper reported a strong liquidity position as of September 2024, with US$2.7 billion in cash reserves. Debt maturities are staggered, with US$500 million due in 2025 and most long-term obligations scheduled for 2035 to 2050. The company plans to fund its capital spending, estimated at US$1.1 billion in 2024, increasing to US$1.5 billion annually from 2025 onward, through operating cash flow and strategic debt issuance.

Moody's outlined potential factors that could lead to changes in the ratings. A downgrade could result from further negative developments in sovereign ratings for Mexico or Peru, declining profitability in copper markets, or an inability to execute the capital spending program without increasing debt. Conversely, an upgrade is unlikely but would require maintaining competitive cost structures, growth project execution, and achieving specific financial metrics, like adjusted gross debt to EBITDA below 1.5x and EBIT margins above 20%.

Moody’s Downgrades Mexican Outlook

On Nov. 14, 2024, Moody's revised the outlook for Mexico's sovereign rating from stable to negative. The change reflects concerns over Mexico's fiscal deficit widening to over 5% of GDP in 2024, with debt expected to increase from 40% of GDP in 2023 to above 45% by 2025, potentially reaching 50% by 2027-28 without significant fiscal consolidation. Debt affordability has also deteriorated, with the interest-to-revenue ratio climbing from 10% pre-pandemic to 15% in 2023 and projected to remain at 15%-16% in the coming years.

Moody's cited weakening policymaking and institutional frameworks, including reforms to the Judiciary, which could erode checks and balances and dampen investor confidence. Additionally, the government’s continued financial support for PEMEX increases fiscal risks, as sovereign debt may absorb part of the company’s liabilities without resolving its recurrent losses. While Mexico's diverse economy and prudent policy history support its Baa2 rating, fiscal challenges and institutional risks cast doubt on long-term stability, Moody’s noted.