Executive Summary / Key Takeaways

• Integrated Strength Amidst Global Flux: Ternium (TX) leverages its vertically integrated steel and mining operations, particularly in Latin America, to maintain a cost-efficient and adaptable business model, positioning it as a resilient player in a volatile global steel market.
• Strategic Mexican Expansion as a Growth Engine: The $4 billion Pesquería expansion project in Mexico, featuring advanced EAF-based steelmaking for automotive products and new finishing lines, is a cornerstone of Ternium's growth, aiming to capture nearshoring demand and strengthen its competitive moat in North America.
• Commitment to Shareholder Returns and Cost Discipline: Despite a peak CapEx year in 2025 (projected $2.5-$2.6 billion), Ternium is committed to sustaining attractive dividend payments, supported by robust cash flow generation and a targeted $300 million in cost efficiencies for 2025.
• Navigating Trade Headwinds with Regional Focus: Ternium is actively adapting to evolving U.S. trade policies and combating unfair imports from Asia in its key markets (Mexico, Brazil, Argentina), advocating for regional trade defense mechanisms and leveraging its localized production capabilities.
• Technological Edge and Decarbonization Leadership: The Pesquería project's ability to produce exposed automotive steel with significantly lower CO2 emissions via EAF technology, coupled with a 15% decarbonization target by 2030 (including Scope 3 emissions), highlights Ternium's commitment to sustainable and advanced steelmaking.

Forging a Future: Ternium's Integrated Strategy in a Shifting Steel Landscape

Ternium S.A. (TX) stands as a formidable force in the global steel industry, primarily operating across Mexico, the Southern Region (Argentina), and Brazil. Its core business revolves around the manufacturing and distribution of a comprehensive range of steel products—from slabs and heavy plates to advanced hot and cold rolled, coated, and stamped steel parts for the automotive sector. Complementing its steel operations, the company's Mining segment provides essential iron ore and pellets, underpinning a vertically integrated model that is a foundational strength. This integration, encompassing both upstream raw material sourcing and downstream value-added processing, allows Ternium to exert greater control over its cost structure and supply chain, a critical advantage in an industry characterized by cyclicality and intense competition.

The global steel market is currently undergoing significant transformations, driven by China's persistent overcapacity and subsequent surge in exports, which has destabilized international prices and challenged local manufacturers worldwide. In response, regions like North America are increasingly focused on strengthening domestic supply chains and implementing trade defense measures. Ternium's overarching strategy is deeply aligned with these trends: it prioritizes operational efficiency, aggressive cost reduction, and strategic expansion into high-value segments, all while advocating for robust regional trade policies to counter unfair competition.

Ternium's competitive positioning is particularly strong within Latin America, where it holds a leading market share. While it competes with global giants like ArcelorMittal on scale and diversified players like Nucor Corporation and Steel Dynamics on efficiency and technological innovation, Ternium differentiates itself through its deep regional expertise and integrated model. This allows for agile responses to local market dynamics and tailored product offerings. For instance, its integrated operations, combining steel production with in-house mining, provide a material advantage in raw material stability and potentially lower manufacturing costs compared to competitors who may be more reliant on external commodity markets. This strategic control over raw materials helps Ternium counter the sheer scale of ArcelorMittal by exploiting weaknesses in raw material access, potentially improving pricing power in Latin American markets and enhancing financial outcomes through stable cash flows.

Technological Differentiation and Innovation: The Pesquería Edge

A cornerstone of Ternium's competitive strategy and a significant technological differentiator is its ongoing expansion project at the Pesquería Industrial Center in Mexico. This multi-billion-dollar investment is not merely about increasing capacity; it's about fundamentally transforming Ternium's product capabilities and environmental footprint. The project integrates advanced technology across its new lines, including pickling, finishing, cold rolling, and galvanizing. These enhancements are designed to increase operational efficiency, significantly improve product quality, and expand Ternium's product range to meet the stringent requirements of high-demand sectors like the automotive and appliance industries.

The most impactful technological advancement within the Pesquería project is the upstream steel shop and Direct Reduced Iron (DRI) facilities. This innovative setup will enable Ternium to produce exposed material automotive steel using an electric arc furnace (EAF) steelmaking process. This is a critical differentiator, as it allows for the production of high-quality automotive steel with significantly lower CO2 emissions compared to traditional blast furnace methods. This EAF-based approach positions Ternium at the forefront of sustainable steelmaking, offering a tangible benefit in a market increasingly prioritizing environmental performance. The expanded capacity from this project, totaling 1.5 million tons per year of new capacity (with 0.5 million tons replacing older, less efficient lines), will also be crucial in meeting the growing "melted and poured" steel requirements within the USMCA region, further solidifying Ternium's integration into the North American supply chain.

Ternium's commitment to sustainability extends beyond Pesquería. The company's wind farm in Argentina, which commenced operations by the end of 2024, is expected to deliver approximately 480 gigawatt-hours per year, significantly reducing reliance on third-party electricity and contributing to decarbonization goals. Furthermore, Ternium's latest Sustainability Report outlines an updated decarbonization target: a 15% reduction in emissions intensity by 2030, using 2023 as a baseline. Notably, this target now includes Scope 3 emissions, which are not directly associated with the company's operations but reflect its broader environmental responsibility. This comprehensive approach to technological advancement and sustainability enhances Ternium's competitive moat, contributing to higher-value product offerings, lower operational costs through energy efficiency, and a stronger market position in an increasingly environmentally conscious industry.

A History of Strategic Growth and Market Adaptation

Ternium's journey has been marked by strategic acquisitions and organic growth initiatives. Incorporated in 2003, a pivotal moment arrived in 2012 with its initial participation in Usiminas, a key Brazilian flat steel producer. This involvement deepened significantly, culminating in the July 2023 acquisition of an additional stake, increasing Ternium's control group participation to 51.50%. This move led to the full consolidation of Usiminas's financials from July 2023, substantially bolstering Ternium's footprint in the Brazilian market. This historical expansion into Brazil, alongside its established presence in Mexico and Argentina, underscores Ternium's long-term strategy of building a diversified regional powerhouse.

The company's history also includes continuous investment in modernization, exemplified by the Pesquería project. This project, with its advanced pickling and finishing lines already operational and the cold rolling mill and galvanized line slated for ramp-up by December 2025, represents the culmination of years of strategic planning to enhance product capabilities and operational efficiency. These investments are a direct response to evolving market demands, particularly from the automotive sector, and position Ternium to capitalize on emerging trends like nearshoring in North America.

Financial Performance and Operational Resilience

Ternium's financial performance in the first half of 2025 reflects a challenging yet resilient operating environment. For the six-month period ended June 30, 2025, the Steel segment reported net sales from external customers of $7.61 billion, down from $9.08 billion in the same period of 2024. The operating income for the Steel segment (management view) also saw a decrease, from $871.27 million in H1 2024 to $433.40 million in H1 2025. The Mining segment, while smaller, contributed $266.71 million in net sales from external customers in H1 2025, an increase from $207.64 million in H1 2024, though its operating income declined from $73.59 million to $39.90 million over the same period.

More recently, in the second quarter of 2025, Ternium delivered an adjusted EBITDA of $403 million, a 25% sequential increase over the first quarter, primarily driven by stronger realized steel prices in Mexico and favorable deferred tax results due to the Mexican peso's revaluation. Net income for Q2 2025 was $259 million, which included a $40 million provision adjustment related to ongoing litigation concerning the Usiminas acquisition. Excluding this provision, adjusted net income stood at $299 million. This performance, despite a slight increase in cost per ton and lower shipments in Mexico and the U.S., demonstrates the company's ability to leverage pricing power and cost efficiencies.

Ternium's liquidity remains robust, even amidst significant capital expenditures. Cash from operations in Q2 2025 totaled $1 billion, aided by a substantial reduction in working capital. However, the net cash position decreased to $1 billion at the end of June 2025, primarily due to elevated CapEx and a $353 million dividend distribution. The company's balance sheet remains solid, with a TTM Debt/Equity ratio of 0.21, indicating conservative leverage.

Strategic Initiatives and Forward Outlook

Ternium's strategic initiatives are deeply intertwined with its outlook. The Pesquería expansion project is progressing well, with the cold rolling mill and galvanized line slated for ramp-up in December 2025, and the upstream steel shop and DRI facilities anticipated by Q4 2026. This project's total CapEx has been revised to $4 billion, with 2025 projected as the peak year for investments, estimated between $2.5 billion and $2.6 billion. Management expects this investment to yield an EBITDA per ton of around $150 to $200 for the new capacity, with an additional $30-$40 per ton from cost efficiencies by replacing older capacity.

Management anticipates a sequential improvement in EBITDA for Q3 2025, supported by ongoing cost efficiency measures and operational improvements. The company is targeting an average EBITDA margin closer to 15% by Q4 2025. This outlook is underpinned by an expected "slight increase in shipments," led primarily by Mexico, with some support from Argentina and stable volumes in Brazil. A key driver for Mexico is the government's measures to increase domestic production defense against unfair trade practices, which has already contributed to a decrease in steel imports. Ternium is pursuing a $300 million decrease in cost efficiency for the full year 2025, compared to 2024, with two-thirds expected in the second half of the year. This includes optimizing logistics, improving procurement, and enhancing production processes.

The company's commitment to shareholder returns remains firm. Despite the significant CapEx cycle, management has reiterated its intention to sustain dividend payments, citing Ternium's strong financial position. The proposed dividend for fiscal year 2024 represents a payout ratio of approximately 70% and a dividend yield of 7.83%.

Competitive Landscape and Risks

Ternium operates in a highly competitive and increasingly regionalized global steel market. Its primary competitors include global players like ArcelorMittal (MT), and U.S.-centric mini-mill operators such as Nucor (NUE) and Steel Dynamics (STLD). Ternium's integrated model and strong regional presence in Latin America provide a competitive advantage, allowing for better control over raw material costs and tailored market approaches. For example, its EBITDA margin of 11.59% (TTM) is competitive within the sector, though direct comparisons with competitors' TTM margins can be challenging due to varying reporting standards and market exposures.

However, Ternium faces significant competitive challenges. The surge of unfair imported steel, particularly from China, continues to undermine local competitiveness in markets like Brazil. Maximo Vedoya, Ternium's CEO, emphasized the urgent need for the Brazilian government to respond decisively to these unfair trade practices, noting that the impact extends beyond the steel industry to the wider manufacturing sector. In Mexico, while government measures have helped reduce steel imports, the business environment remains cautious due to ongoing U.S. trade policy negotiations and tariffs. The U.S. government's imposition of a 25% tariff (later increased to 50%) on steel imports and a 25% tariff on imported automobiles creates uncertainty, though Ternium is adapting by increasing local supply.

A long-standing litigation related to the 2012 Usiminas acquisition, involving CSN (SID), continues to pose a risk, with a $40 million provision adjustment made in Q2 2025. Ternium has filed an extraordinary appeal to the Supreme Federal Tribunal, maintaining that the claims are without merit. Additionally, foreign exchange restrictions in Argentina, while gradually easing, still present a complex operating environment.

Conclusion

Ternium S.A. is strategically positioned to capitalize on the evolving dynamics of the global steel industry, particularly the trend towards regionalization and nearshoring in North America. Its core investment thesis is anchored in its vertically integrated business model, which provides cost efficiencies and supply chain resilience, and its aggressive investment in advanced, lower-carbon steelmaking technology at Pesquería. This project is not just an expansion but a transformative step, enabling Ternium to meet the high-quality demands of the automotive sector with a significantly reduced environmental footprint, thereby strengthening its competitive moat and aligning with global decarbonization efforts.

While the company faces headwinds from global overcapacity, unfair trade practices, and geopolitical uncertainties, management's proactive cost reduction initiatives and strategic market focus are expected to drive sequential EBITDA improvements and margin expansion. The commitment to sustaining attractive shareholder returns, even during a period of peak capital expenditure, underscores a disciplined financial approach. Investors should recognize Ternium's long-term growth potential, driven by its technological leadership, strategic market positioning, and robust operational execution, as it continues to forge a stronger, more sustainable future in the Americas.