Southern Has Copper Giants in Crosshairs With Peru Expansion

(Bloomberg) -- Southern Copper Corp. is preparing to scale the ranking of global producers by spending more than $10 billion in Peru and Mexico, taking advantage of rising prices underpinned by years of industry belt-tightening.

The fifth-largest copper producer hopes to start work on its Tia Maria project in Peru next year as community resistance eases, Chief Financial Officer Raul Jacob said Thursday in an interview from Lima. Based on the economic benefits it will bring, a majority of the local population now supports Tia Maria, he said.

Still, the company won’t go ahead until the social conditions are right. It’s looking to add education programs to its health initiatives in the area to help build community support. The project was stalled by deadly protests in 2015.

Tia Maria is the most advanced of three projects that Southern Copper plans to develop in the country for a combined spend of about $7 billion. Together with investments in Mexico, the company wants to lift capacity to 1.7 million metric tons by 2025 from about 900,000 tons now, leapfrogging Glencore Plc and BHP Billiton Ltd. to become the No. 3 producer of the red metal, Jacob said.

Capacity will surpass 1 million tons next year when a new concentrator at its Toquepala mine in Peru is operating fully.

“During the last five years we’ve not seen significant investment worldwide,” he said. “There were projects but not enough to cover the demand we will see in the next few years.”

Public acceptance of Tia Maria in the surrounding areas is also a pre-requisite for obtaining a construction permit from the government. Earlier this month, President Martin Vizcarra said more time is needed to address the local population’s concerns.

Last week, Arequipa regional governor Yamila Osorio said she didn’t see a bright future for the project after a Southern Copper official suggested some local opposition can be explained by the fact Abimael Guzman, founder of the Shining Path guerrillas, was born in the area. Jacob said the comments were unfortunate and “don’t reflect the company’s position at all.”

Southern Copper, a unit of Grupo Mexico SAB, plans to invest $1.4 billion to build Tia Maria, adding 120,000 tons a year of output. The company won the rights to develop the Michiquillay deposit in February and expects the government to hand over licenses in June.

Jacob said the company is considering an expansion of its refining capacity and may make a decision this year. One option would be to grow its Ilo operation, with $1 billion being a “fair” estimate of the project’s size, he said. A new plant in Mexico, the U.S. or Europe are other options.

Southern Copper, which hasn’t tapped the bond market since 2015, may look to break that drought to help finance its project pipeline, he said.

Still, the company may not need the debt market. With margins among the widest in the industry, it’s on track to generate about $1.2 billion of free cash flow this year, according to the average estimate among analysts tracked by Bloomberg. That would be the highest level since the super-cycle peak of 2011.

While the company is “not shy” about bringing in partners on certain projects, generally speaking it owns 100 percent of its assets and is in a financial position to go it alone, Jacob said.

©2018 Bloomberg L.P.

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