Leaders of Latin American public companies should be sitting pretty these days. Many of the region’s local economies are enjoying real gross domestic product growth rates that are among the highest in the world, improvements in corporate reporting and disclosure are reassuring foreign investors more than ever, and many companies are trumpeting sound fundamentals and robust profits.
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However, skittishness about the strength and sustainability of the global economic recovery — particularly in the U.S. — continues to cast a long shadow over Latin American and other emerging markets, with investors demonstrating a willingness to yank money out of equities at the first sign of trouble anywhere in the world.
“The two biggest issues right now are the downshift in U.S. economic data over the summer and the second stage of quantitative easing in the U.S.,” explains Ben Laidler, director of Latin American equity research for J.P. Morgan in New York. “On the back of that has been the flow-of-funds story into the emerging markets in all sectors, which in turn has produced lots of noise on capital controls. Overall, global drivers predominate.”
And those drivers can wreak havoc. Case in point: Sovereign-debt woes half a world away, in Dubai and then in Europe, sent Brazil’s benchmark Bolsa de Valores, Mercadorias e Futuros Bovespa index plunging nearly 11 percent at the start of the year, as investors fled stocks in search of safer havens. Those losses were reversed by April, but then China’s announcement that it was reining in its stimulus spending, in an attempt to cool down its own overheating market, sent the Bovespa tumbling 19 percent by May. It subsequently recovered, gaining 19 percent through September, as Brazil’s — and the region’s — torrid growth showed no signs of slowing. Just the opposite, in fact.
Last month the International Monetary Fund revised its 2010 forecast for the region upward, predicting that GDP growth in Latin America and the Caribbean would accelerate by 5.7 percent this year (compared with 4.8 percent for the global economy), with the most vigorous growth expected in Paraguay (up 9 percent), Uruguay (8.5 percent), Peru (8.3 percent), and Argentina and Brazil (7.5 percent each). Much of that growth is fueled by worldwide demand for the region’s commodities.
Investors keep pouring money into Latin America, especially the more-developed markets of Brazil and Mexico, in search of gains they can’t find in Europe and the U.S. (where the IMF expects 2010 GDP growth of only 2 percent and 2.6 percent, respectively). According to the Institute of International Finance, a Washington-based association of banks and other financial institutions, the region is on track to see capital inflows in excess of $213 billion this year, up nearly 56 percent from last year’s $137 billion. Of that total a whopping $148 billion will be directed to Brazilian equities, the IIF predicts.
Throughout Latin America a new wave of chief executive officers, chief financial officers and directors of investor relations is working to transform its companies into regional dynamos. These business leaders know that to maximize their companies’ potential in a time of robust growth and extreme volatility they have to help investors keep negative financial news in context — that is, that most of it has little or no lasting impact on the region’s markets — and focus on the many positives as they expand their reach, increase shareholder value and lay the foundation for long-term success.
The corporate leaders who have done the best job of rising to the challenge are cited in the tables on the surrounding pages in our inaugural ranking of the Latin America Executive Team, which highlights the region’s best CEOs, CFOs and IR Professionals, as well as the companies with the most-valued investor relations, as determined by analysts on both the buy and sell sides. (More-detailed results can be found on our web site, institutionalinvestor.com.)
The most honored company is Cosan. Buy- and sell-side analysts agree that the Brazil-based sugar and ethanol producer is home to the Agribusiness sector’s No. 1 CEO (Marcos Marinho Lutz), CFO (Marcelo Eduardo Martins) and IR professional (Luiz Felipe Jansen de Mello); they also say Cosan provides better investor relations than any of its peers.
Much of that success is attributable to Lutz, who was appointed to the top post in October 2009 and wasted no time in making his mark on the company, the world’s largest sugar-cane processor. “It’s been a year of big structural changes during a challenging time,” says the 41-year-old Lutz, who is based in São Paulo.
One change that caught the world’s attention took place in February, just a few months after Lutz was named CEO: Cosan signed a nonbinding memorandum with Europe’s largest oil company, Royal Dutch Shell, to form a $12 billion joint venture for the production of ethanol from sugar cane. The deal became binding in August, although it is still awaiting regulatory approval. Lutz predicts it will close near the end of the first quarter.
Under the terms of the agreement, Shell will put up $1.6 billion in cash plus other assets, including more than 2,700 service stations, and Cosan will put up 23 cane-crushing mills and more than 1,700 gas stations (it owns the rights to the Esso and Mobil brands in Brazil) and other assets. In addition, Cosan will transfer some $2.5 billion in liabilities to the as-yet-unnamed venture, leaving it room to borrow money to finance acquisitions. “The JV will be supported by a strong balance sheet, strong cash flow generation and a steady basis of distribution operations,” Lutz says. “Cosan will see a large increase in equity by obtaining this new partner. The opportunities for growth are huge.”
The deal will enable Cosan to increase production of ethanol throughout Brazil and better position both companies to explore new opportunities for producing and selling ethanol globally, he adds. Cosan, which currently accounts for 5.7 percent of the world’s ethanol market, could see that figure soar to 20 percent as a result of the partnership with Shell.
For now, Lutz says, Cosan will focus on increasing ethanol sales in Brazil, where there is a ready market. In 1993 the Brazilian government mandated that gasoline sold in the country must contain 22 percent ethanol by volume; that figure increased to 25 percent in 2007. Flexible-fuel vehicles, which run on any proportion of gasoline-and-ethanol mix, were introduced in Brazil in 2003 and by last year accounted for more than 90 percent of all new-vehicle sales.
“Brilliant” is the word one portfolio manager uses to describe Cosan’s joint venture with Shell. “It will help the company position itself for sustainable, long-term growth, especially given the rising interest in climate change and the need to lower emissions, without shifting the focus away from the company’s core efficiencies,” this buy-sider says. “Cosan’s management team has consistently shown that they understand what it takes to stay on top in a rapidly changing environment.”
The global financial crisis — and its continuing reverberations — underscored the need for Cosan to diversify its operations, which is what attracted Lutz to the Shell venture.
“In the past, when we were pure players on sugar, we were more exposed, as everything was based on the price of commodities,” he explains. “We designed this venture to help us prepare for any difficult times to come. We offer a portfolio of possibility to investors.”
Those possibilities even include an infrastructure play. Cosan is majority owner of Rumo Logística, which oversees the shipping of sugar from production sites to storage at the Port of Santos, where it operates the world’s largest sugar-export terminal. Cosan exports about 70 percent of the sugar and 30 percent of the ethanol it produces each year. In July asset managers TPG Capital of Texas and Gávea Investimentos teamed up to buy a 25 percent stake in Rumo Logística, paying Cosan 400 million reais ($226 million). The infusion of capital will enable the company to invest in other infrastructure projects throughout Brazil.
As the company has expanded, so has its shareholder base. Once a favorite of niche investors, Cosan is now drawing a lot of money from mainstream investors, Lutz says.
“We are large enough in terms of liquidity for most investors, and we have become a very compelling story in terms of strategic positioning,” he explains. “People buy our stock to gain exposure to all of our operations, and they like that we control the chain.”
They also like the profits that the company is racking up. For fiscal 2010, which ended in March, Cosan’s net revenue increased a jaw-dropping 143 percent, year over year, from R6.3 billion to R15.3 billion. “That is huge growth during crisis times,” Lutz says proudly.
Phenomenal growth through strategic expansion in tough times is a trait that Cosan shares with Wal-Mart de México, the top-ranked company in Mexico. In February the discount retailer, which is 68 percent owned by Wal-Mart Stores of Bentonville, Arkansas, acquired from its parent company Walmart Centroamérica in a $36.6 billion pesos ($2.8 billion) deal; the latter subsidiary operates hundreds of stores in Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. To close the deal, Walmex offered Centroamérica stockholders the option of receiving cash or new shares in the consolidated company; most opted for the latter.
“That most shareholders chose to keep the stock was a sign of their belief in the potential of the company,” observes Rafael Matute Labrador, the top pick among buy- and sell-side analysts for Best CFO in Consumer Goods & Retailing.
“For the first time we are operating in more than one country,” says Matute, 50, who has been CFO since 1998, noting that the deal made strategic sense because “there is very high similarity between customers in Central America and Mexican consumers.”
Consolidating the two businesses has created opportunities to streamline costs, improve operational efficiencies and increase shareholder value, the Sinaloa-based finance chief adds.
“Our sales growth has been remarkable, given the very challenging environment,” says Matute. In the second quarter, the first full quarter following the integration of the two companies, Walmex reported a 26.7 percent increase in net sales over the comparable period in 2009, to 80.6 billion pesos ($6.5 billion), and a 21 percent increase in net earnings, to 5.7 billion pesos; last month it reported a year-over-year net profit increase of 10 percent, to 4.25 billion pesos. “‘Every day low prices’ is not just a slogan for us, it’s a strategy. We don’t use the word ‘recession.’”
Looking for ways to cut costs and pass the savings on to consumers “is in the DNA of the company,” Matute adds. For example, “we used to have a labor-intensive distribution network but have moved toward installing automated distribution centers that have increased output by 40 percent” and increased the number of stores served by a single distributor by some 33 percent, he says. As a result, “with our growth we didn’t need to lay off workers — we just didn’t hire as many more people,” Matute explains.
He believes the potential for expansion will remain strong for a long time. “The region is very attractive,” he says. “We looked at the number of cities we are in already and where we could go, and that showed us the larger potential. There are currently 145 million inhabitants in the region, and over the next 15 years there will be another 25 million in the productive age of new customers.”
Walmex in February announced plans to build 330 more stores throughout the region by the end of this year — or the equivalent of increasing floor space by 11 percent — and hire 7,000 new employees. It is already Mexico’s largest private sector employer, with some 180,000 workers.
With such a good story to tell, Walmex makes sure its shareholders are kept informed of every development. “We give more information than is required by law,” proclaims Matute. “Every month we publish sales reports on our web site. We improved our quarterly conference calls; now they are webcasts that include slides and transcripts, both in English and Spanish.”
In addition, the company hosts an annual shareholders meeting each February that includes tours of local stores and distribution centers, presentations from executives and at least one lunch or dinner with all of the company’s vice presidents. “It is really an important opportunity for shareholders to meet the entire management team, and it is also webcast,” says Matute.
The investor relations team, which includes a director and an assistant manager, arranges one-on-one meetings between executives and investors, regardless of the number of shares they own.
“We meet with at least one or two investors per week, and I personally meet with around 30 percent of them,” Matute notes, adding that about 20 percent of his time is devoted to investor relations. “The level of interaction increased this year, especially from the CEO and me, basically for two reasons: We became an international retailer, and we have a new CEO.”
Scot Rank Crawford, formerly chief operating officer, was appointed to the top job in January after Eduardo Solórzano was promoted to president and CEO of Walmart Latin America.
Analysts are impressed with the management team’s efforts. According to Loredana Serra, leader of Morgan Stanley’s top-ranked troupe in Retailing on the 2010 Latin America Research Team, “Three factors set Walmex apart from the competition: a multiformat approach that enables it to appeal to the full range of potential customers and gives it maximum flexibility to grow, an unwavering focus on lowering costs and passing the savings on to consumers, and a management team that is focused on delivering superior return on investment.”
Those factors are interwoven, Matute observes: “By maintaining our focus on exceeding our customers’ expectations, we are able to exceed our shareholders’ expectations, too.”
Pundits often say the economic crisis resulted in a tectonic shift in the financial landscape, but that phrase is more than just a metaphor to Luis Llanos Collado. The CFO of pulp and paper products manufacturer Empresas CMPC (the highest-ranking Chilean company on the Latin America Executive Team) was jolted awake at 3:34 on the morning of Saturday, February 27, as an earthquake measuring 8.8 on the Richter scale — the strongest earthquake in the region in half a century, and nearly 20 times more powerful than the temblor that had reduced Port-au-Prince, Haiti, to ruins the previous month — rattled central Chile.
“When the tremor started the high-frequency pitch I heard reminded me of the 1985 earthquake, but soon I realized that this was a bigger one,” recalls Llanos, 48. The intense shaking lasted an agonizing minute and a half; when it subsided he was relieved to discover that his family — his wife, two daughters and two sons — were unhurt, and the house sustained only minor damage.
“After the first shock communication networks were jammed and operated only intermittently, and the main electric grid went down,” the Santiago-based executive explains. “With some effort — through SMS messages and fixed telephone lines — I was able to communicate with the rest of my family, and I was relieved that everybody was fine.”
Llanos next turned his attention to his company and its employees. “A few minutes after the first shock, after hearing radio broadcast reports about how shakes were felt in distant places like Puerto Montt and Valdivia in southern Chile and Mendoza in Argentina, I realized that the epicenter must have been close to our main industrial concentration area near Concepción,” he says. This incident fit squarely with what CMPC executives call its “probable maximum loss event” scenario. Llanos immediately started to try to communicate with executives in charge of the company’s facilities in that area.
“Our first priority was to locate and check the status of all our personnel in the affected areas and help them to get supplies; fortunately, nobody in our personnel or their relatives suffered significant injuries,” Llanos says. “Then our focus was to speed up the damage assessment. We contacted main equipment suppliers and consultants, and by Monday many engineers and technicians were on flights from Europe and North America to reach Chile through Argentina — Santiago’s international airport was shut down — to help us. The work needed to restart operations was huge and had to be done under difficult logistic conditions and recurrent aftershocks, many of them reaching magnitudes over 6 on the Richter scale. Extensive topographical work was required to realign equipment and to assess small but noticeable changes in the configuration of the sites.” The company estimated damage to its facilities at more than $170 million.
To add to the urgency, when news of the quake was reported, pulp prices surged as investors and analysts predicted a supply shortage. CMPC’s executive team knew they had to get production up and running quickly, to capitalize on the price increase and maintain the company’s expansion efforts and stunning surge in profits; the month before the quake, the company had reported that fourth-quarter profits had jumped 94 percent over the previous quarter, to $123.3 million, owing to soaring demand. Llanos knew they had to get the word out that CMPC was down — for a while — but certainly not out.
“Board members and key shareholders were well informed of the first assessment during day No. 2 after the quake, and on a daily basis afterwards,” Llanos says. “There were also press releases that were made public during the week after the quake.”
As if to underscore the precariousness of the situation, a major aftershock disrupted one of the company’s conference calls. “On March 11 we held a conference call related to our 2009 financial statement. While [investor relations director María Trinidad Valdés Monge] was addressing the management discussion of the fourth-quarter results, a 6.9 Richter aftershock broke out, followed quickly by further aftershocks measuring 6.7 and 6.0,” Llanos recalls. “Many office buildings in Santiago were evacuated that day. We carried on and completed that call with an extended question-and-answer session.”
Llanos says shareholders were concerned about the lasting effect of the earthquake on the company’s facilities. “We let them know that damage to the mills and infrastructure was not serious, but the recovery would take days, weeks or even months, depending on the particular mill situation.”
Some of the facilities were back in operation within a week after the disaster; all were operational within two months — a time frame that exceeded most analysts’ expectations.
“It was a great achievement for all of our operating and maintenance crews,” says Llanos, with understandable pride. “We learned many valuable lessons from this experience and have improved our emergency operating procedures, equipment standards and building requirements.”
With the company in full swing, Llanos and his associates could turn their attention back to the expansion strategy they embarked upon in 2009. Last December the company acquired Brazil-based Fibria’s Guaíba unit in a $1.4 billion deal that vaulted CMPC to the No. 2 pulp producer in the world (behind Fibria). To finance the deal, CMPC issued $500 million in new bonds and $500 million in new shares and borrowed some $400 million from Brazilian and Chilean banks.
“This acquisition was made in the middle of the crisis, but it’s in economic downturns that opportunities arise,” says Llanos, who has been CFO since 2004. “Fortunately, we had a healthy balance sheet that allowed us to close the transaction.”
The consolidation of the Guaíba assets in Brazil will increase CMPC’s hardwood capacity to 450,000 tons a year and enable it to increase annual pulp production to 1.75 million tons. Guaíba was CMPC’s second acquisition last year; in April 2009 the company bought São Paulo–based tissue producer Melhoramentos Papéis.
“From a strategic point of view, these deals sealed CMPC’s entry into Brazil, which improves our ability to serve global customers,” he says. “Having pulp-production facilities on both sides of South America also increases our economies of scale in forestry, operations and logistics.”
Analysts agree. “CMPC has a top-notch management team,” declares Josh Milberg of Deutsche Bank Securities, who leads the top-ranked team in Pulp & Paper on this year’s Latin America Research Team. “We believe management’s strength and acumen are evident from the moves it’s made to expand outside Chile. Its decision to acquire Fibria’s Guaíba unit last year was very bold because of the magnitude of the investment involved — the $1.4 billion deal is the largest foreign acquisition in the country’s history. At the same time the deal was very compelling from a strategic standpoint, offering the company a foothold in Brazil and a means to expand pulp capacity longer term, taking into account Chile’s lack of available land.”
Llanos, who has been with the company in various positions since 1986, has worked hard to maintain CMPC’s impressive balance sheet. Sales for the 12 months through June topped $3.7 billion, with earnings before interest, taxes, deprecation and amortization of $889 million (an ebitda margin of 24 percent), $2.2 billion of net debt and $565 million in cash.
“These figures reflect a very strong cash flow from operations, which arises as a result of a consistent and coherent capital investment program,” Llanos says.
CMPC works to achieve a ratio of net debt to ebitda of less than 2.5 and to have sufficient cash on hand to allow the company to pay the next 18 months’ debt and expenses, Llanos says. “All of these measures have been recognized by the investor community and are reflected in the terms of our financing,” he adds, noting that CMPC’s BBB+ credit rating from Standard & Poor’s and Fitch Ratings is one of the highest in its industry.
The Matte Group, which is controlled by Chile’s billionaire Matte family, holds 55 percent of CMPC’s shares and appoints five of the company’s seven board members; the remaining shares are held by investors large and small. Llanos estimates that he devotes one quarter of his time to addressing the needs of these investors.
“Because of the regional expansion process that we have experienced during the past few years, we have experienced a higher demand for attention from investors and requests for more frequent interaction and thorough coverage,” he observes. CMPC has a three-member IR team, but Llanos notes that all employees are expected to support investor outreach initiatives.
“I am keen on involving line managers to explain their business to investors,” he says. “It helps our people get a grasp on investors’ sensitivities and also conveys a more colorful representation of what we are doing.”
CMPC has also focused efforts on increasing the number of analysts who provide coverage. “We now have more than 20 financial institutions issuing reports about CMPC,” Llanos says, and he expects that figure to rise in the coming year as the company continues to expand throughout Latin America.
“There is huge growth potential in the pulp and paper industry, due to low per-capita paper and paper products consumptions,” he explains. “As soon as the region’s per-capita income grows, there is going to be a higher demand for our products, presenting us with a horizon full of challenges and opportunities.”
Llanos hints that more acquisitions may be in the offing, possibly elsewhere in the region. “CMPC is always looking for opportunities that match our strategy in each of our business lines,” he says. “Geographically, we have a focus on Latin America, which we believe has strong growth potential.”
Taking advantage of opportunities throughout the region has also helped Cementos Argos, the highest-ranked Colombian company on the Latin America Executive Team, weather the economic downturn. Next month the company’s Panamanian subsidiary will begin work on a three-year, $65 million contract to rebuild locks on the Panama Canal — a job for which Cementos Argos began aggressively bidding more than a year ago, as its business opportunities in the U.S. were drying up, according to CFO Ricardo Andrés Sierra Fernández.
The hit the company took in the U.S. was a hard one, with sales of its ready-mix cement and other products plummeting 50 percent since 2007. “The situation in the U.S. has been challenging for the whole industry,” says Sierra, noting that many construction projects have ceased to move forward or have been abandoned altogether, owing to excess capacity, weak demand and a decline in commercial property rates, among other factors. “We had to make a lot of effort internally, especially in terms of our cost structure,” he says.
Despite the dearth of new cement and concrete orders in the U.S., Argos has been able to keep its head above water better than many of its peers, thanks to the company’s strong financial situation and some good decision making on Sierra’s part. For example, the Bogotá-based finance head made sure to match up Argos’s long-term capital investitures with its long-term financing, to prevent committing short-term cash to long-term investments.
“Even though debt is a good source of funding for growth, we are always cautious and conservative when considering new investments,” explains Sierra, CFO since 2005. The company restructured its debt in September 2009 so that “the compounded average maturity of our outstanding debt outflows — principal plus interest — is five years.”
Another safeguard: Argos’s nonoperating assets can be easily divested if the necessity arises. “We have an investment portfolio which is worth more than $3 billion,” he says. “We also have a land bank and coal assets that can be used as a source of funds.”
In fact, the company has already taken steps to spin off its noncore assets, to improve profitability. In April 2009, Argos sold its El Hatillo and Cerro Largo coal concessions and related logistics to Vale for roughly $373 million; and earlier this year it sold its stake in an investment holding company, Grupo de Inversiones Suramericana, for 260 billion Colombian pesos ($1.4 billion). The latter transaction allowed Argos to report a consolidated net profit of 461 billion pesos in the first nine months of this year, a leap of 73 percent (in local currency terms) over the comparable period in 2009.
Sierra also says he is committed to keeping down distribution costs, and he regularly conducts supply-chain management analysis in search of ways to do that. U.S. business volume is performing in line with company expectations, he adds.
“We have seen the price of cement reduced 10 to 15 percent in some markets, and that immediately affects the ready-mix price,” he says. “All the cost-cutting efforts you do internally can not make up for those fast price reductions. Even though we are doing a lot, it’s not well reflected in our numbers.”
Indeed. In a July conference call with investors to discuss performance for the first half of the year, CEO José Alberto Vélez Cadavid noted that revenues had declined 18.5 percent, to 1.5 billion pesos, compared with the same period one year earlier. However, he also pointed out that, over the previous six months, consolidated assets increased by 1 percent, to 14.8 billion pesos; liabilities decreased by 8 percent, to 4.5 billion pesos, and shareholder equity gained 5.3 percent, to 10.3 billion pesos.
Sierra says his team understands the importance of keeping money managers informed, especially when times are tough — as they are now. “Our IR director is always in direct contact with shareholders, investors and analysts,” he says, estimating that he spends 15 to 20 percent of his time on investor relations, including meetings with investors and quarterly conference calls. “We make lots of effort to communicate our specific situation to shareholders.”
The concern he hears most frequently from investors is about the situation in the U.S. and its impact on Argos. “They try to compare our situation to players in the industry in the U.S., and they are worried,” Sierra says. “But once the U.S. question is taken away and they focus on Colombia, they understand the potential growth of Latin American markets. We spend a lot of time discussing projects in Colombia and across the Caribbean.”
In August, Argos began production at a new plant in Cartagena, Colombia. The company’s $400 million investment in the cement production facility will expand Argos’s capacity by almost 20 percent annually. “This will be very important for our future numbers, as it took us almost four years to finish the project,” Sierra says. The Cartagena plant will also play a crucial role in the Panama Canal project, thanks to its capacity expansion of up to 3 million tons per year and its strategic location: It is less than one day away from Panama by ship.
Moreover, Argos’s business in Colombia — which accounts for 50 percent of its total revenues — is heating up. Government-sponsored infrastructure projects have driven up demand, with sales in the company’s ready-mix unit up 40 percent year to date through September.
“We are having an infrastructure boom in Colombia, which should continue for the next three years,” Sierra says. Areas of focus include ports, residential construction and roads — all projects in which Argos is looking to participate. “We will definitely see many more projects coming in the future,” he adds.
One big change that Sierra anticipates — along with many other market participants — is for Colombia’s credit rating to be restored to investment grade, an improvement that could come as soon as next year. Colombia’s credit rating was downgraded to junk status in 1999, when an economic crisis decimated the country’s financial sector.
“Recently, the different rating agencies have improved the outlook for Colombia — a good sign to get us to investment grade in the near term,” he says. “If that happens a lot of foreign funds will come to Colombia. They can’t invest today because we don’t have investment-grade status, but that could change soon. So far, 17 different banking institutions have been trying to find executives to open offices here. We have not seen that before.”
Despite the difficulties of the past two years, Sierra remains upbeat. “The growth prospects of our company are very strong in the Colombian and Caribbean markets,” he says. “The recession defeated us in the U.S., but Colombia and the Caribbean are performing well and are balancing out our situation in the U.S.”
Not that he’s giving up hope regarding the U.S. market. “We are conservative, and we think our business in the U.S. will have a tough time in 2011, but we expect to see some recovery by 2012,” Sierra says. “We established long-standing relationships with customers in the U.S., in terms of credit and technical support, and our most important relationships were with customers who suffered the most” from the economic downturn. Nonetheless, Sierra says, he is confident that, when the crisis passes, Argos will be well positioned to serve those customers again.
Waiting for a crisis to pass is something with which Raúl Jacob is all too familiar. Manager of financial planning and investor relations for Southern Copper Corp., the Peruvian subsidiary of Mexico-based mining behemoth Grupo México (and the top-ranked Peruvian company in our survey), Jacob spent the better part of the past three years updating shareholders on developments involving striking miners at Grupo México’s operations in Cananea, Mexico.
“It’s not the best narrative you can have,” Jacob acknowledges. The Cananea mine had represented 26 percent of Grupo México’s copper-mining capacity. “We had no production from this unit since the time of the crisis, which certainly did not make things easier,” Jacob adds.
Friction between the company and the union can be traced to the early 1990s but intensified in 2005, after Grupo México set aside $55 million in a trust account as part of an agreement with the union when the company was privatized. Soon after, the union took control of the trust, and before long the Mexican government accused labor leader Napoleón Gómez Urrutia of fraud and embezzlement. He fled to Canada, claiming to be a victim of political persecution for calling attention to unsafe working conditions in the company’s mines.
In July 2007 more than 1,000 union workers seized possession of the Cananea mine as a show of solidarity with their leader (who was reelected to his post twice while he lived in self-imposed exile) and in demand of safer working conditions. They vandalized parts of the facility and brought production to a shuddering halt, says Jacob, 50.
“It was hard for us to transmit the message to shareholders that fighting with the union to the finish was good, and some shareholders became discouraged as the conflict dragged on for so long,” he explains. “However, the quality of the company’s assets was such that investors decided to stick with us.”
Ensuring that loyalty meant keeping investors informed. “We communicated to our shareholders constantly,” says Jacob, who is based in Lima. He made a point of expressing the company’s confidence that it would prevail in its battle against the union without making it appear that Grupo México was engaged in a Goliath versus David showdown. “It was a delicate situation,” he recalls. “We had to explain to shareholders that the reason we wanted to finish any relationship with this union is because we wanted to have these assets developed back at full capacity again.”
Southern Copper also set up a phone line and e-mail address exclusively to handle investor inquiries about the strike. “I personally read all the e-mails that came through,” says Jacob. He also took phone calls, set up one-on-one meetings and made presentations. “Shareholders always knew what was going on and the progress the company was making on the legal front,” he adds.
The legal struggle lasted until February 11 of this year, when a Mexican Federal Court ruled in favor of Grupo México and allowed the company to terminate its contract with the workers. The union’s appeal was dismissed in April by the Mexican Supreme Court, which ended the legal process, and in June police removed the miners from the site. (Gómez Urrutia was acquitted of fraud and embezzlement charges by a Federal District court, and a warrant for his arrest was dismissed.)
At the same time that Jacob was working to shift shareholders’ attention away from the strike and toward the company’s plans for growth and increased output, the global economy was melting down. Copper prices plunged from a 2008 precrisis average of $3.62 a pound to $1.56 by the first quarter of 2009, he says, and demand for copper slipped 7 percent last year.
“We had to adjust to new circumstances in which cash flow control was extremely important to maintain the company’s long-term progress,” he adds. “However, we knew that because of the low cost structure that characterizes Southern Copper, the firm would be able to generate cash flow despite the low metal prices we had in 2009. And, consequently, we were able to move on with our projects — but at a slower pace.”
Once the court case with the miners was settled, the company immediately began repairing the damage to the mine. Two units, representing 30 percent of Cananea’s capacity, were up and running by September, and the company expects to have the mine at full capacity — producing some 180,000 metric tons of copper a year — by February.
In the meantime, Southern Copper is working on significantly expanding its operations and expects to double its production within the next four years, from about 500,000 metric tons a year to more than 1 million. “We think we can further increase it by 50 percent by the end of the decade — that is our strong plan for organic growth,” Jacob notes.
To help finance some of that long-term growth, the company in mid-April issued $1.5 billion in debt, $400 million in ten-year bonds at 5.375 percent and $1.1 billion in 30-year notes at 6.75 percent.
“We believed that was an excellent moment to tap debt markets and had an excellent response: The deal was oversubscribed by six times the supply,” Jacob says. “The bond offering was a way to fund the resources we needed to go ahead with future copper projects, such as the Tia Maria greenfield and the brownfield expansions of La Caridad, Toquepala and Cuajone. It also provided an opportunity to have a more balanced capital structure between debt and equity.”
Analysts say the company’s record speaks for itself. “Southern Copper has consistently been one of the top performers in the Latin American mining sector over the last few years,” says one sell-side equity researcher. “The company has been very diligent in returning cash to shareholders, having one of the highest dividend yields in the industry. It is now preparing itself for its next big step, after solving very difficult conflicts with labor unions. The focus is now on growth, as the company is willing to monetize its long-life reserves by doubling its capacity over the next five to seven years.”
Although he acknowledges the lingering effects of the global recession, Jacob is equally optimistic about Southern Copper’s prospects. “Demand is not growing as strongly as it did three or four years ago, but we still expect to see positive growth,” he says. “We believe our company is the best copper play for investors. We are doing our job on the operational side, and there is a strong potential for growth and value creation for shareholders.”
Despite the turmoil of the past few years, Jacob says, Southern Copper has learned some valuable lessons: “We now understand how to more clearly transmit information and explain our case.” In September, he adds, the company completed the overhaul of its web site, making it more accessible so that “investors can understand very quickly who we are, how we operate and where we want to go together.”
Making sure investors know where a company is going — and keeping them informed every step of the way — is a hallmark of corporate excellence, one that money managers say is readily apparent in the actions and initiatives undertaken by the members of the 2010 Latin America Executive Team.
