Grupo Mexico: buying the best copper company in the world at a discount

In part 8 of the Mexican series, I focus Grupo Mexico. This company is the best way I know to get exposure to copper. You get Southern Copper at a discount plus some quality assets for free.

Continuing on my way to cover all Mexican stocks I found Grupo Mexico. This company deserves an article on its own. As a bonus I will separately discuss GMXT in which Grupo Mexico owns a 70% stake.

Grupo Mexico

Grupo México S.A.B. de C.V. is active in copper mining, freight railroad service and infrastructure development. This is a typical combination.
Market cap 780B pesos (39B USD), total assets 597B pesos, net debt 39B pesos, equity 322B pesos. Net income 60B pesos (3B USD) in 2023. Grupo Mexico reports their numbers in USD.

My first instinct was to dismiss this rather strange combination. Looking at other copper mining companies I found out that 11 times earnings for a copper mine is actually really attractive.

In this article I will not be bothering you with the great prospects of copper long term. Electrification will increase demand & all miners like always say that supply will stay tight indefinitely. In addition, you have risks in China. Read the presentation of Southern copper or another miner yourself to get the basic understanding.

Copper at the start of the year has gone up and now is back to earth. The recent decline probably has something to do with recession fears and the relation between copper and manufacturing (doctor copper).

Not an expert in valuing mining companies. Had success though with Fortescue in Australia (less so with Norilsk). I guess learning by doing. Mining is clearly the most important part of Grupo Mexico with 76% of revenue and 82% of profits.

The freight railroad has its own listing (market cap 142B pesos & 21B net debt) and will be discussed separately in more detail below this article. The valuation at 16 times earnings compares favorably to US peers (Union Pacific at 24 times earnings). Seems fair and responsible for 22% of revenue and 17% of earnings. Grupo Mexico owns 70.26% which is worth 100B pesos (5B USD).

Infrastructure development: another strange hotchpot of activities including:
energy, oil rigs, toll roads & real estate. Just responsible for 3% of revenue and 2% of earnings. Can understand the toll roads & energy (might be needed for mining operations & some overlap with a railroad). The segment is profitable & growing. Given its small size I will not give it too much attention.

Grupo Mexico mining

So, with the less important stuff out of the way focus on the bread and butter of Grupo Mexico, mining.

In general, I would describe myself as a fan of mining companies, but this is a mining company I can get a warm feeling for.

Grupo Mexico owns 88.91% of Southern Copper (market cap 75B USD). The company with the largest and lowest cost copper reserves in the world.

Southern copper has a clear focus on Peru & Mexico, so not totally convinced of their diversified presence.

High reserves & low-cost lead to growth & high profits long term. This looks attractive especially given the very manageable debt load of 4.5B USD (90B pesos).

If an investor wants to have low-cost exposure to copper Southern Copper is a very attractive way to get it. Unfortunately, this is recognized by the market given the 76B market cap and price earnings ratio of 27.4.

The good news is that Grupo Mexico owns 88.91% of Southern Copper and only has a market cap of 39B USD. Just its share in Southern Copper is valued at 67.5B.

As a nice bonus Grupo Mexico also owns Asarco. A US copper mining company with 3 mines and a smelting plant in Arizona and a refinery in Texas.

Conclusion on Grupo Mexico

Buying a controlling stake in high quality Southern Copper valued at $67.5B + a controlling stake in a dominant rail company at $5B for a total of $39B seems attractive. It gets even better when you get some additional mining assets & infrastructure assets in the mix for free plus a net cash position at the holding level ($3.15B of net cash at year end 2023). Investors also get a decent 3.58% dividend yield while they wait for a rerating.

Mining is not fitting well within the richer Mexicans theme though. Since richer Mexicans will care more about the environment & will demand higher wages. This does however not mean that this stock is not a suitable investment.

Discount to Southern Copper is so significant that I will put it quite high on my buy list though. I have at this moment 0% exposure to mining and a bit of exposure might be a good thing from a diversification standpoint.

My main point of concern is the value of Southern Copper. Yes, these are quality assets, but are they worth 27 times earnings? Personally, I’m not convinced that shortages will materialize in the future and push copper prices higher. Copper remains a cyclical commodity which could be hurt by a global slowdown. The downside case: you get a significant discount on your copper assets, but this discount is warranted. If you are convinced that copper will follow iron ore than Grupo Mexico loses much of its appeal.

Gmexico Transportes (GMXT)

As an addition to my article on Grupo Mexico my analysis of Gmexico Transportes. GMXT is the largest rail company in Mexico. In addition, it has some US operations.

GMXT is an obvious beneficiary from nearshoring. More factories in Mexico producing goods for the US market will lead to more rail traffic.

The share price has been relatively flat in the last couple years. Earnings have increased from 6B pesos in 2019 to 8.6B in 2023. In addition, investors do receive a decent dividend (which is quite a bit lower than the yield on Mexican government bonds though).

If interest rates in Mexico decrease the yield on Grupo Mexico Transportes will become a lot more enticing.

The company fits well in the richer Mexican theme. Richer Mexicans will buy more stuff. In addition, the main competitor of rail is trucking which is more labor intensive. Higher wages might thus lead to a shift in market share towards rail.

Q2 2024 results are strongly impacted by measures of the Mexican government to stem the flow of migrants. GMXT estimated that they lost 13.5% of revenue in Q2 2024 due to more controls leading to slower movement of cargo.

Nevertheless, the GMXT managed to deliver 5.7% revenue growth and 4.7B pesos of net income in H1 2024.

The debt load at 21B pesos is manageable. Do want to state that according to Buffett the true earnings of railroads are lower than the stated earnings due to underreporting of depreciation compared to true maintenance capex. Still 16 times earnings seems like a fair to attractive price to pay for an asset heavy company with good growth prospects (better can US counterparts I assume). When compared to 24 times earnings for UNP GMXT looks very attractive. The problem is that in my mind it is more the 24 times earnings for UNP which are too high. So I’m not inclined to think that Grupo Mexico Transportes is attractive enough at current prices to warrant a buy.

As a part of Grupo Mexico though it is a really nice quality business you can buy at a significant discount. That is if you like to have exposure to copper.

Disclaimer: These are my ideas and not personal investment advice. I might own shares discussed and can sell those shares at all times. I don’t know your financial situation. Do your due diligence and do not blindly follow an article on the internet.