/
Analysis

Peñoles’ Diversified Portfolio Leads to Growth

Wed, 10/21/2015 - 09:28

inevitable that Industrias Peñoles (Peñoles) will be one of the first companies to be mentioned. The company dates back to 1887, when it was founded in Durango, and played an important role when the government increased its efforts to position local firms in a foreign dominated mining industry in 1961. The company has been listed on the Mexican Stock Exchange since 1968. Peñoles is currently the world’s largest producer of refined silver and metallic bismuth, an important producer of refined zinc and sodium sulfate, and the Latin American leader in the production of refined gold and lead. Peñoles’ mining division is dedicated to the extraction of gold, silver, lead, zinc, and copper in order to turn these minerals into concentrates and produce copper cathodes. 2008 was an important point for Peñoles’ mining activities, as the company restructured its mining operations by forming two divisions: precious metals and base metals. As part of this strategy, Fresnillo plc, the division in charge of operating the famous Fresnillo mine in Zacatecas, as well as other precious metals projects, went public in Mexico and London, while Peñoles retained base metals mining activities. Fresnillo and Peñoles maintain close ties as both continue to belong to holding company Grupo BAL.

In the third quarter of 2014, Peñoles’ exploration division drilled a total of 26,353m in Mexico, Peru, and Chile, reaching new zones and confirming the presence of minerals in advanced projects. Geologic and geophysical studies were also performed in preparation for the drilling stage. The group’s project at Ancash, in the Peruvian province of Sihuas, is at the final stage of the exploration phase, making it likely that this country will become the home of Peñoles’ first international extraction operations. As for domestic exploration advancements in 2014, drilling operations in La Industria, close to the Velardeña mine in Durango, identified a series of veins that could be added to the mining unit. A preliminary estimate infers resources of 3.3 metric tonnes of lead, silver, and zinc. Furthermore, after a preliminary study of the Los Humos copper and molybdenum project in Sonora, it was determined that more metallurgic information was needed. This sees Los Humos currently undergoing an extensive sampling campaign. Exploratory drilling activities are also taking place at Milpillas in Sonora in hopes of increasing reserves. The results obtained during the last trimester of 2014 show an extension of the primary Milpa Profundo body. An estimate of the resources will be published once this campaign is finished.

Peñoles currently operates seven mines, excluding those that are operated by Fresnillo. In the state of Chihuahua Peñoles operates the Naica mine, which is famous for its wonderful cave filled with selenite crystals as well as producing lead, zinc, and silver. However, after major flooding at Naica in January 2015, operations were suspended, with engineers at the mine estimating it could take five to six months to clear the water and resume production. Brokerage firm Intercam has stated that Peñoles stands to lose MX$178 million pesos (US$11.96 million) for every 15 days the mine stays shut. However, a number of mines show the diversity in Peñoles’ production strategy. Francisco I. Madero in Zacatecas is a producer of zinc, lead, silver and copper, while Milpillas, which began operations in 2006 in Sonora, was Peñoles’ first copper mine. Tizapa is a lead producer in the State of Mexico while Sabinas and Velardeña are exploiting copper, lead, and zinc concentrates.

In mid-2013, Peñoles resumed operations in its Velardeña unit, which had been shut down four years prior. Works to rebuild the plant started in 2010 and US$230 million were invested in this endeavor, positioning Velardeña as the second most important mine in Durango and one of the top five mines for Peñoles industrial minerals operations alongside Francisco I. Madero, Tizapa, Bismark, and Naica. In 2013, Velardeña’s crushing plant worked its way through 1.16 million tonnes of materials, leading to a production of 41,197 tonnes of zinc, 1,761 tonnes of lead, 11,391kg of silver, and 687 tonnes of copper. The mine has an estimated life of 15-20 years, but exploration activities have given hope that this number could be surpassed if similar deposits are found in the Velardeña district. Peñoles also wants to seize the opportunity this unit provides to implement state-of-the-art technology and improve processes. The most visually striking aspect of the Velardeña facility is its dome used for grinding and storing. It was built to prevent the migration of minerals and fine materials into the environment and to safeguard the materials from the rain. This is an innovative structure, as although it has been widely deployed in cement factories, such domes are not common at mining sites. Solar panels can also be found on the roof of the dressing rooms so that processes like water heating can be carried out using renewable energy. Similarly, several water treatment plants allow recycled water to be used for certain industrial processes instead of tapping up the local supply. Such environmental measures extend to the tailings dam, where a reforestation program was carried out as a measure to prevent damage to the ecosystem. Such programs led to the company being chosen to be part of the first sustainability IPC at the Mexican Stock Exchange in 2011, which also granted Peñoles a Sustainable Enterprise award.

Peñoles’ metallurgy division changed its strategy in late 2013, when the company merged its Met-Mex and Aleazin subsidiaries, forming Metalúrica Met-Mex Peñoles to integrate its refining and alloying activities. Met-Mex Peñoles is a non-ferrous metallurgical complex that produces refined silver and metallic bismuth. It consists of two circuits, the first one consisting of a lead-silver refinery where lead and silver concentrates are processed to produce lead bars, and a silver-lead refinery where materials rich in precious metals are processed to produce gold, silver, lead, and bismuth, among others. The Met-Mex industrial complex processes the majority of the zinc and lead ores produced in Mexico and is the largest producer of silver in the world, the largest producer of zinc in Latin America, and Mexico’s most important producer of gold and lead. It has an installed capacity for lead smelting of 180,000 t/y, of which only 77% was used in 2013. The lead-silver refinery also has a capacity of 180,000 t/y and produces an annual average of 118 million ounces of silver, 1.9 million ounces of gold, and 1,440 tonnes of bismuth. The Aleazin plant in Ramos Arizpe, Coahuila, produces zinc alloys, and Peñoles also runs the Bermejillo facility in Durango, which processes byproducts obtained from metallurgic operations to produce copper sulfate, zinc sulfate, and antimony trioxide.

Peñoles is also involved in the chemical industry with the production and commercialization of sodium sulfate, magnesium oxide, magnesium sulfate, and ammonium sulfate. Industrias Magnelec deals with magnesite chemical and Fertirey processes sulfuric acid. The most importantunit in this division is probably Quimica del Rey. In spite of the obstacles the mining industry has faced in recent years, Peñoles made a major investment of US$500 million in Coahuila, of which US$230 million was destined to expanding the Química del Rey plant. This facility produces sodium sulfate, the base component in detergents, and magnesium oxide used in fire bricks. Its national importance is evident in the fact that 9kg of every 10kg of sodium sulfate used to make detergent in Mexico come from this plant. Química del Rey now ranks among the five largest sodium sulfate producing facilities in the world, and might jump two or three positions up the rankings once it operates at full capacity. A few months prior to beginning its expanded operations, the modified plant had an annual production capacity of 630,000 tonnes of sodium sulfate. At the end of 2013, with improvements that were already in place, production reached 670,000 tonnes and will top out at 780,000 t/y once it reaches full capacity.

As for most mining companies, 2014 was a challenging year for Peñoles in financial terms. The value of the Mexican peso against the US dollar did make the mining group more cost-competitive, especially considering that 80% of its sales are made in dollars. However, the company’s financing is done in US dollars, increasing its debt. On the upside, Peñoles reported an EBITDA of MX$4.16 billion in the third quarter of 2014, a 10.9% year on year increase due to larger sales volumes in silver, copper, and zinc, as well as lower extraction costs. These factors ultimately mitigated the drop in international metal prices since Peñoles’ sales amounted to MX$15.5 billion.