Grupo Mexico: Undervalued, Family-Run Controlling Holder of Southern Copper

Francisco Carrillo of Mexico Value Partners presented his in-depth investment thesis on Grupo Mexico (Mexico: GMEXICOB) at Best Ideas 2018.

Grupo Mexico not only has the largest copper reserves in the world but through its subsidiary, Southern Copper (NYSE: SCCO), is also the lowest-cost producer in the world. Grupo Mexico is owned by family operators, the Larrea family, which has done a superb job of capital allocation, as evidenced by the projects in which the company has invested over the years. Investors have an opportunity to buy Grupo Mexico essentially at “negative value” of ~12 pesos per share, because the company’s 89% ownership of SCCO is worth 120% of Gropo Mexico’s market capitalization. Investors essentially pay nothing for the non-SCCO assets, including the largest railroad operation in Mexico (a duopoly, with Kansas City Southern the main competitor) with close to $1 billion in EBITDA, and other assets, including toll roads, cogeneration plants, and oil platforms in lease to Pemex, which together account for close to an additional $1 billion in value. At the recent share price, the valuation remains undemanding at ~6x this year’s EBITDA and an FCF yield of close to 10%. As new projects materialize, the company should grow cash flow in the low-teens through 2019. Francisco sees upside of nearly 40%, assuming copper prices of $2.90 per pound. The sum-of-the-parts valuation discount provides downside protection.

About the instructor:

Francisco Carrillo began his investment career some 20 years ago as an analyst at GBM Grupo Bursátil Mexicano. His tenure at GBM lasted close to 10 years and he held various responsibilities during that time, culminating with his participation in the firm’s investment committee. After GBM, Carrillo co-founded Sabino Capital, a Mexico-based investment partnership. Later, he briefly worked at Bestinver, a renowned Spanish investment advisor. In 2012 he and two other partners founded Mexico Value Partners, a Mexico-based investment partnership where he currently serves as Chief Investment Officer.

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