Production of key precious and industrial metals set to expand in Mexico

The mining sector is one of the longest-operating industries in Mexico, extending back almost 500 years. According to the Mining Chamber of Mexico (Cámara Minera de México, Camimex), the country was the world’s number-one producer of silver, the seventh-largest producer of copper and the ninth-largest producer of gold in 2017, and responsible for 1.7% of the world’s output of mineral ore.

However, investors are approaching the sector cautiously amid changing political circumstances, as the administration of President Andrés Manuel López Obrador, who took office in December 2018, halted the issuance of new titles for exploration. This has created uncertainty regarding access to new mining land.

Performance 

According to Camimex, in 2018 the mining sector generated MXN443bn ($22.9bn) in revenue, contributing 2.4% to GDP and 8.2% to the industrial sector. The top-five metals made up 82.9% of total mining value. Gold was the most valuable metal, comprising 24.6% of the total, followed by copper (24.6%), silver (14.8%), zinc (8.9%) and iron (4.9%).

In 2018 mining generated $18bn of foreign currency reserves, up from $17.5bn in 2017, making the sector as the sixth-largest supplier of hard currency behind tourism ($22.5bn), oil and gas ($26.5bn), remittances ($33.5bn), electronics ($72bn) and the automotive sector ($142.2bn). However, 2018 was marked by decreased output and value; 18 out of 29 minerals posted weaker production volumes, causing value to moderate from $12.8bn to $12.6bn.

Sluggish growth in the industry was the result of a number of factors, including high taxation rates, which have been blamed for reducing competitiveness. Mining companies are lobbying the government to improve taxation conditions; however, as of mid-2019 the royalty rate stood at 8% for precious metals and at 7.5% for all other minerals, which are in addition to corporate taxes. Some stakeholders attribute a lower-than-expected performance to the global economic slowdown in 2018 and stronger environmental regulations in China, which have had negative spillover effects on global commodities trading.

Mining investment stayed buoyant in 2018, increasing by 13.7% to reach $4.89bn. This marked two consecutive years of rebounding figures from a decade-long low of $3.75bn in 2016, although levels remain short of the 2012 peak of $8bn. Although the new administration has generated some policy uncertainty, investment is the mining sector is still viewed as long-term undertaking, and is therefore less exposed to short-term political risk than some other areas of the economy. As such, Mexico is seen as retaining its competitive position in the region when it comes to mining investment.

Size & Scope 

There are around 270 companies operating over 900 projects in the sector, led by mostly US, Chinese and Canadian firms. Mining remains dominated by large multinationals and some have underscored the need to lower barriers to entry for smaller firms.

“Small and medium-sized enterprises usually require between MXN500,000 ($25,900) and MXN1.5m ($77,600) to start exploration activities,” Alfredo Tijerina, managing director of government-backed mining lender Fideicomiso de Fomento Minero, told OBG. “We have to encourage commercial banks to grant these companies loans under a comprehensive credit framework to keep activity running at full capacity.”

Industrial Metals 

Looking ahead, Mexico is planning to bring an additional 106,000 tonnes of copper, 110,000 tonnes of lead and 100,000 tonnes of zinc production on-line in 2019-24, according to Camimex, although figures could be affected by an expected global economic slowdown. Copper production in Mexico is closely tied to global demand for electric vehicle batteries. According to the Copper Development Association, demand for the metal is expected to increase by 1.7m tonnes by 2027. A large share of copper production comes from the Buenavista del Cobre mine project in Sonora, operated by domestic firm Grupo México. The open pit mine has a capacity of around 55,000 tonnes of copper cathode per annum and is the world’s second-largest copper mine by reserves. Meanwhile, in Zacatecas, production at the Aranzazu underground mine commenced in 2018, with Canadian operator Aura Minerals announcing the first shipments of copper concentrate in October of that year. Aura Minerals estimated that production at the mine would reach almost 10,400 tonnes in 2019. Grupo México is also developing the El Arco Copper Mine in Baja California, which in 2013 was estimated to have more than 1.5bn tonnes of copper ore.

Increased production of electric vehicles will boost demand for lithium as well. UK-based Bacanora is developing clay lithium deposits in Sonora. With over 5m tonnes in reserves of lithium carbonate equivalent, the mine in Sonora is one of the largest deposits in the world. According to Camimex, the mining facilities are under construction and will likely come on-line within three years. “They have set a date of 2021, although financing issues have caused delays,” Erika Hernández, the director of statistics at Camimex, told OBG.

Gold & Silver 

Despite caution in the short term, some investors remain focused on the promising outlook for precious metals. The country has posted declines since 2017 but holds its place as a competitive player in the international gold market. Gold production has risen considerably over the past decade, from 50.8 tonnes in 2008 to 121.6 tonnes in 2018, though this is down 6.4% from 130 tonnes in 2017.

Part of the decrease in 2018 was due to blockades at US-based Newmont GoldCorp’s Peñasquito Polymetallic Mine in Zacatecas. Operations were halted in March 2018 and again in September 2019 due to water supply issues affecting the local community. As Peñasquito is the second-largest silver mine in Mexico and accounts for 17% of total gold output, production is likely to be constrained into 2019 unless issues are resolved. Looking ahead, there are a number of gold and silver projects commencing in 2019-24. Camimex expects 19 projects to add 34 tonnes of gold and 1020 tonnes of silver production during that period, making Mexico the six-largest global gold producer in terms of volume.

Security Issues 

The blockades at the Peñasquito mine reflect wider community challenges in Mexico’s mining sphere, notably in terms of unions. In some instances, companies are forced to recruit new personnel through the mining union, instead of hiring directly.

Another challenge for the mining industry is the prevalence of train robberies. A sizeable number of firms depend on the railway system to move product from interior mines to coastal ports. Because of Mexico’s security issues with organised criminal cartels, train robberies have become more common.

“In the Sinaloa and Chihuahua states, there have been some reports of isolated incidents of train robberies of some metals,” Hernández told OBG. “However, the problem has not become overly persistent. It is clearly a concern, but there was no sizeable spike in incidents in 2018,” he further explained. While some stakeholders have warned that security issues could increase if the newly formed National Guard cannot curb the escalation in criminal activity in some of Mexico’s rural areas, the National Guard is reported to have the authority to act as a police force, unlike the military, which could help it to more effectively address the crime situation.

The capacity of the country’s railways presents another constraint. The two main rail companies – Ferromex, owned by Grupo México, and Kansas City Southern – operate separate concessions, limiting competition and contributing to high transport costs. Because of this, many mining companies have instead opted to use road freight transport, which brings its own security risks (see Transport & Logistics chapter). Grupo México’s iron business is one of the few exceptions and regularly uses railways for mineral transport. Mexico’s mining industry might face temporary headwinds tied to waning investor confidence and a potential slowdown in global trade; however, precious metals stand to benefit in that scenario. Meanwhile, rising demand for electric vehicles appears likely to support continued production of copper and lithium.