Mining in Mexico: Part 1

Mexico is famous for mariachi music and mineral production.

Mexico is a major producer of silver, gold and base metals. In addition, the country is also a leading producer of celestite, bismuth, fluorite, cadmium, molybdenum, graphite, and manganese.

In the Fraser Institute’s most recent Survey of Mining Companies issued on February 23rd, 2012, Mexico ranked #21 globally and behind only Chile in Latin America for Current Mineral Potential.

The survey factors in current regulations and land use restrictions. Also in the report were the following quotes from company executives:

“We found that the enforceability of the mining policies is implemented in a friendly business oriented manner by the authorities, who perceive the mining investors as developers of communities. Local authorities participate in a joint manner with the federal government to help companies to fulfill the environmental and mining policies for the mining business benefit.” — A consulting company, Associate.

“Straight forward application maintenance procedures.” — An exploration company, President.

“Mexico has good technical people working on the regulatory offices.” — A producer company with more than US$50 million revenue, Manager.

What makes Mexico a good place for miners to do business? In favour of brevity, we’ll summarize what we learned in the following bullet points:

  • Historically Mexico is the world’s #1 silver producer with a historic production record of over 10 billion ounces of silver and current annual production of over 100 million ounces a year. Most deposits are high grade and amenable to low-cost underground and surface mining.
  • Mexico is a textbook example of “sustainable development”.  For over 500 years mining has been the foundation and an ongoing integral part of the national and local economies. This takes on increasing importance as migration from rural areas to cities increases due to lack of rural employment opportunities. Mines create economic anchors wherever they are found and allow rural residents to maintain well-paid, dignified and productive occupations in their home territories.
  • Politically, Mexico is one of the most stable mining countries in Latin America. The country has a favorable tax structures and a strong government commitment to natural resource development. Between 1990-1992, Mexico radically overhauled a nationalistic mining law structure for the expressed purpose of attracting foreign mining investment. This overhaul was accompanied by privatization of virtually all of the Mexican governmental mining holdings and an active retreat from competing with the private sector in mining exploration and development.
  • Since 1992, Mexico has demonstrated a strong commitment to increasing transparency in all aspects of government and in the regulation of the mining industry. Foreign companies now compete with Mexican companies on an equal basis.
  • Mexico has strong environmental laws and a commitment to uphold them, but effective obstructionist environmental organizations are few. This means that mining outfits who follow the Mexican laws and internationally accepted environmental practices can expect to advance their projects without undue interference.
  • Culturally, Mexicans are friendly towards mining at all levels. This means mining exploration companies and developers can generally expect to be welcomed when they enter an area.
  • The Mexican mining community is well trained, both at the professional and skilled labour levels, and fully in tune with the latest mining technologies. Specialized and normal mining equipment is readily available with good technical support.
  • Mexico remains under-explored. Major discoveries have been made over the last 20 years by application of modern geological and geophysical concepts and methods. Sergio Almazan Esqueda, former Director of the Mexican Mining Chamber states, “70% of Mexico’s territory is likely to contain minerals. Of this 70%, only 30% has been explored.”

But it’s not all mariachis and minerals in Mexico. An important issue for the Mexican mining industry, and the Mexican economy in general, is the escalation of violence since the government’s crackdown on organized crime and drug trafficking. This move has led to insecurity in some regions of the country and, subsequently, a sharp decline in foreign direct investment flows.

Mining projects, which are often in remote areas of the country, have seen an increase in operational costs as higher security services are needed or, in a few situations, been cancelled completely. Canadian mining giant Goldcorp (Stock Profile – TSX:G & NYSE:GG) built a landing strip to fly gold out of its Los Filos mine as the country’s highways become more fraught with “banditos”.

In 2010, it was reported by an executive at top silver producer Fresnillo (Stock Profile – LSE:FRES) that 150 gold and silver bars worth $3 million were stolen from one of their mines in the central state of Zacatecas. In response to these issues, Manuel Luevanos, President of the Mexican Mining Chamber commented, “Unfortunately, where we operate the response from authorities has not been as fast as we would have liked.”

There are also some problematic social situations with respect to semi-communal farming co-ops called “ejidos” and “social justice” NGOs focused on water issues that have hounded companies like New Gold (Stock Profile – TSX:NG & AMEX:NGD), First Majestic Silver (Stock Profile – TSX:FR & AMEX:AG) and Vista Gold (Stock Profile – TSX:VGZ & AMEX:VGZ).  These problems are real and increasing. However, companies that make the effort to develop good lines of communication and integrate themselves in their local Ejido-based communities from the onset tend to enjoy strong support instead of opposition.

Despite challenges, Mexico remains a top destination for mining investment in Latin America. The country offers political and financial stability, as well as a very attractive tax system without corporate taxes and royalties and, most importantly, great geology. Spending on new projects is on the rise and Mexico has received $21 billion in industry investment from 2007 to 2012.

PricewaterhouseCoopers may have summarized mining in Mexico best in their annual, Mining in the Americas – 2012 Report, “Mexico is an important player in worldwide mining. The mining industry continues to thrive with an annual production of US$13.9 billion, contributing to 1.6% of the country’s gross domestic product (GDP). It generates 290,000 direct jobs and 1.5 million indirect jobs.”

For the related articles:

Mining in Mexico – Part 2 – CLICK HERE.

Mexico – 3 Mining Stocks to WatchCLICK HERE.

Mike Luft

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