Mining in Mexico: activity and expectation is high in 2018

13 February 2018 (Last Updated February 12th, 2018 14:51)

Analysis by BMI Research predicts that Mexico’s mining industry will experience one of the fastest recoveries in Latin America due to the strong price performance of its key commodities – gold, silver, copper and zinc – along with a steady project pipeline and supportive regulatory framework. Heidi Vella profiles Mexico’s mining sector and its prospects for 2018 and beyond.

Mining in Mexico: activity and expectation is high in 2018

Mexico is a prime mining destination, with a 500-year history of exploration and production. With the country’s abundant resources of gold, silver, zinc, copper and iron, along with a stable government and attractive financial market, interest is once again peaking.

Last September, the Mexican Government published a report estimating a nearly 50% year-on-year increase in mining investment to $5.5bn in 2017.

Furthermore, for the second year in a row, BMI Research says the Central American nation will see one of the strongest recoveries regionally, due to a solid pipeline of projects, competitive operating costs, supportive government policies and rising metal prices.

Already, Mexico’s mines produce 1.7% of the world’s output of mineral ores and the country is the largest producer of silver globally.

In 2015, a report by the Mexican Mining Chamber of Mexico stated the target minerals in Mexico as gold (34.1 %), silver (18.5 %), lead (2.8 %), copper (19.7 %) coal (1.6 %), zinc (6.5 %) and iron (4.6 %).

But it is growing demand for zinc and copper that promises to boost Mexico’s mining sector going forward.

Strong mineral portfolio

BMI analysts expect prices for Mexico’s key domestic commodities to perform well until at least 2020, creating good signals for investment in the country.

In particular, the firm predicts that zinc and copper will remain outperformers due to a demand-driven deficit for copper and a deficit due to supply restraints for zinc. The company is also positive for Mexico’s largest mineral sector, precious metals, but slightly less bullish for gold.

Aside from rising commodity prices, Mexico’s project and competitive operating costs will drive growth, says Molly Shutt, a commodities analyst at BMI Research.

“Notably, Mexico’s top domestic miners increased spending in 2017, while most miners in the region, and globally, were still cutting back.”

This includes both junior and senior miners developing projects in the country, with most juniors in the precious metals sector and larger firms active in copper or base metals.

Some significant projects are set to ramp-up over the coming years, across the copper, precious metals, zinc and lead sectors, as well as highly sought-after lithium.

Mexico’s mining projects

Recently, we have noted that elevated lithium prices are prompting project development beyond the top producers of Chile and Argentina, including Mexico,” says Shutt.

Bacanora Minerals continues to develop the Sonora lithium project, from which the firm expects to produce 17,500t of lithium carbonate by 2019-2020, then increase this to 35,000t annually.

The company has acknowledged that operating costs at Sonora will be higher than those of brine operations in Chile or Argentina, but says the shorter time required to produce the lithium carbonate in brine operations is an advantage of the project. The company has established a long-term partnership with Japanese trading firm Hanwa for all lithium carbonate produced at the mine.

Other key projects to look out for in Mexico in 2018, according to Shutt, include Industrias Penoles’ Rey de Plata lead-zinc-copper project, Southern Copper’s expansion at Buenavista and Pilares copper project.

Furthermore, Fresnillo, which has seven operating mines in Mexico, continues to expand operations at the San Julian silver mine. The company’s stock saw a double-digit share price rise of more than 10% in the past couple of months on the London Stock Exchange.

And notably, Sierra Metals recently significantly updated its resources estimates for the Cusi silver mine in Chihuahua State, after completing its drilling programme. The company said that total measured and indicated resources had increased 129% to 4.56 million tonnes (Mt) from the 1.99Mt  previously reported; and total inferred resources increased 36% to 1.633Mt from the 1.2Mt previously reported.

Risk versus reward

Like many countries in Latin America, mining investments in Mexico have ongoing and evolving risks.

Despite Mexico’s stable government and favourable investment environment, last year Reuters reported that the country’s tax agency was holding more than $360m in tax rebates owed to six Canadian miners, including $230m for Goldcorp. The situation has progressed into a showdown ongoing between the Mexican Government and the Canadian mining firms operating there.

Mining companies, which export much of their product and spend heavily on machinery and equipment, typically generate large VAT returns.

Osvaldo Santin, head of Mexico’s Tax Administration Service, acknowledged the problem in an interview with Reuters, saying the agency had seen a spike in VAT refund requests.

Other investment risks in Mexico mirror problems in neighbouring countries, for example, illegal mining, cartel activity and resistance to projects from indigenous peoples.

“We see illegal gold mining and gang activity as more pertinent downside risks to mining in Mexico,” says Shutt, as “unregulated gold mining often attracts violent criminal activity to control the deposits and sell the material and, in general, the widespread presence of criminal syndicates can create security concerns for authorised mining operations.”

Furthermore, in November 2017, two striking workers were fatally shot at a blockade mounted as part of a stoppage they were participating in at a gold mine owned by Toronto-based Torex Gold Resources. Such tragedies and strike actions not only impact lives, but also lead to the loss of output, reputation and incurred costs.

However, Shutt adds that while these challenges persist, the rewards do offset the risks, as reflected in BMI’s Americas Mining Risk/Reward Index, of which Mexico ranks seventh out of 17 countries, behind Peru and Chile.

“The country’s score is boosted by a well-established mining industry, diverse competitive landscape and low labour costs,” Shutt explains.

A positive forecast for Mexican mining

The recovery in Mexico’s mining sector is due, in part, to the global return of the industry amid rising mineral prices. But still, Mexico faired relatively well even through the downturn and its industry recovered sooner than most countries’, according to Shutt.

BMI Research analysis shows that, going forward it is possible that the industry will see larger miners divest from assets in the gold and silver sector in an effort to lower debt and exposure to operational risk.

This will see junior firms, encouraged by rising prices and high-grade deposits, swoop in to develop projects. For instance, BMI notes that Leagold Mining has begun developing the underground Bermejal deposit to expand operations at the Los Filos mine, which the firm acquired from Goldcorp last April for $350m.

However, major miners will remain on track, such as Fresnillo which is set to produce 65 million ounces of silver annually by 2018.

Overall, as the global mining sector recovers, Mexico has significant opportunities for growth as miners take advantage of higher prices, high grade reserves and the country’s well-established mining sector.