Wealth of possibilities: A rich supply of natural resources supports the burgeoning mining sector

Contributing around 5% to the country’s total GDP in 2013, Mexico’s mining sector is among the top 10 world producers for at least 16 minerals. The country is the global leader in silver production and is the tenth-largest copper producer, according to the Mexican Mining Chamber (Cámara Minera de México, Camimex). With a wealth of natural resources, the country is dependent on the mining sector as an important source of income. According to the Mining Development Programme (Prodemin) and the 2014 Camimex annual report, the mining industry will represent the fifth-largest source of external income.

Investing For The Future

The value of the sector is certainly not lost on investors. In 2013 the Metals Economic Group reported that Mexico was the top mining investment location in Latin America and the fourth largest worldwide. Camimex estimates total investment in the mining sector reached $6.5bn in 2013 and $6.1bn in 2014.

The Ministry of Economy (Secretaría de Economía, SE), the authority in charge of mining concessions, has issued more than 32,000 permits for mine exploitation, according to a report by the Mexican newspaper El Universal. The area covered by these permits totals 36m ha, meaning that close to 20% of the country’s surface is under concession to mining companies. Additionally, mining is given preferential treatment over other economic activities, in accordance with the Mexican mining law.

Market Structure

A large part of the local mining market is managed by foreign companies. According to Camimex, 70% of the production volume of the mining industry comes from international companies, while 30% is national.

Many of the leading mining companies in Mexico are Canadian, owning seven of the 11 most productive gold mines in the country. Canadian companies are followed by US, Chinese, Australian, UK and South Korean mining conglomerates. Specific players include Goldcorp, Agnico Eagle, Alamos Gold, New Gold, Yamana Gold and Torex Gold Resources. Peñasquito and Los Filos mines, both operated by Canadian company Goldcorp, led gold production in 2012, with 411,000 oz and 340,000 oz, respectively.

When measured by concession area, six mining groups have proven to be key players. These are Altos Hornos de Mexico, with 3.2m ha; Fresnillo, with 1.9m ha; Industrias Penoles, with 953,0000 ha; Minera Frisco at 889,000 ha; Cascabel Group, with 749,000 ha; and Grupo Mexico, with 607,000 ha.

Challenges

The last two years have seen multiple difficulties arise within the sector. For a second consecutive year, mineral prices have declined. Gold lost 26% of its value between January 2013 and February 2015, falling from $1679 to $1233 per oz. Silver, which is one of Mexico’s leading metals, lost 46% of its value in the same period, moving from $31.84 to $16.92 per oz, and finally the value of copper dropped 29%, from $8264 per tonne to $5689.

Added to the fall in prices, the approval of Mexican tax reform in 2014 imposed an array of new taxes on mining companies – most notably a 7.5% tax over operational cash flow for all mining operations, plus a 0.5% tax for all income for precious metals (gold, silver and platinum). In addition, the mining sector is also considering other tax policies, such as the loss of tax-deductible status of exploration expenses and a tax on dividends, applicable to all taxpaying companies in the country.

The combination of these two factors has led to sharp decreases in total mining production by value. In 2012, the peak year for mining, production was valued at MXN234bn ($15.7bn), a 9% growth from 2011. One year later, 2013 saw a 14% decrease to slightly under MXN201bn ($13.5bn), while 2014 saw a further 51% decrease to MXN98bn ($6.6bn).

Investment estimates have also registered a drop, with estimates for 2015 putting capital expenditure at around $4bn, thus showing the third year-to-year decrease, the largest in many years, at nearly 50%.

Social Issues

The mining sector has historically faced a number of social challenges. In a study by the Economic Commission for Latin America and the Caribbean (CEPAL), mining projects employ local communities mainly at the early stages. As projects progress, employment opportunities for local workers in the community can become more challenging due to the fact that higher-level technical skills are required, which may not be readily available in most communities. This has led to instability in some projects, especially those that are on community-owned, or ejidal, territories. Disputes over royalties paid to landowners have caused conflict and social unrest at many sites, including Minera Peñasquito and the Orko Silver mine in Durango.

Security has also been a rising concern. Issues related to theft, kidnapping and intimidation have been reported on multiple occasions, with one of the most well-known cases involving the theft of a gold cargo with an estimated value of over $10m from McEwen Mining’s El Gallo mine in Sinaloa State. Added to this case, Goldcorp and Torex Gold Resources have reported cases of kidnapping. In one of the most extreme cases, Belgium-based Nyrstar decided to close its Campo Morado mine indefinitely, citing “systematic intimidation”.

Environment 

In Mexico, the 2013 version of the Registration of Pollutant Release and Transfer (PRTR) classified mining and metallurgy as the fourth-largest polluting industry by total emissions.

These emissions are quantified at 25m tonnes of toxic emission per year, which is very close to the 28m from oil and gas and the 29m tonnes from the cement industry. In 2014 a series of ecological disasters, including two toxic waste spills, captured headlines in the industry. Nonetheless, a number of mining companies have a large commitment to the environment, and more than 60 have achieved the “Clean Industry” award that the Federal Attorney for Environmental Protection (PROFEPA) issues.

Even though the mining industry will face many challenges in the upcoming years, the prospects are strong. Together with the tax law, the Mexican Congress approved the creation of a Fund for Regional Sustainable Development of Mining States and Municipalities, which will use funds raised from mining rights to improve the social, environmental and urban development of mining communities. The decree stipulates that from the sum of the proceeds, 20% will be given to the federation and 80% will go to the fund. Allocations will then be distributed to mining municipalities (62.5%) to support community development activities, while the remaining (37.5%) will go to states where mining takes place.

New Opportunities

Mario Cantú, general mining coordinator at the SE, explained during the 2015 PDAC International Convention which took place in Toronto that 15 new projects are expected to be developed in the country in 2015. These projects will see the states of Chihuahua, Sonora and Sinaloa receive the largest investments. Cantú explained that Mexico currently has a portfolio of 902 mining projects managed by 276 companies.

Some of these new projects include Torex Gold’s Morelos Norte mine, which will start producing in 2015. According to its own forecast, Morelos Norte will initially produce 128,000 ounces of gold and 110,000 silver, but will grow to produce an average of 375,000 ounces of gold per year between 2017 and 2024. The project has an estimated investment of $675m and will enter as one of the top three gold mines in the country and top 20 in the world.

Another project is Metates, Chesapeake Gold Corp’s gold and silver mining project in Durango. The mine is expected to surpass all others in terms of gold production. The company estimates production of 845,000 gold ounces per year in its first six or seven productive years. Initial capital costs are estimated at $4.36bn, and the project is expected to start production around 2018.

Additional projects entering operation in Mexico between 2015 and 2018 include two from Fresnillo PLC with a $620m investment, an expansion of Pan American Silver’s La Canadiense mine.

Diversification

At the second International Congress of Mining and Energy hosted in Chihuahua, Mexico in June 2015 Francisco Granados, the head of the Energy Regulatory Commission (CRE), said that various investment opportunities are expected to arise following the implementation of the new legal framework derived from the Mexican energy reform. One of the most relevant is the possibility for mining companies to become small-scale gas producers, thereby taking on an activity previously reserved for the state. Added to the gas production, opportunities in the renewable and conventional energy sectors will open up for mining companies. Permissions for at least 377 small mining and gas production projects are already expected, and Granados explained that the energy-related opportunities, including electricity and gas production, total about 66.54 GW.