STERLING RESULTS

Mexico 2014 | INDUSTRY & MINING | REVIEW: MINING

The Mexican mining sector has weathered international fluctuations in mineral prices, as well as recent political debates about tax increases, yet remains central to the national economy; proposals to begin exploiting Mexico's abundant rare earth elements

Mexican mining experienced a significant boom during the 2000s, which was only briefly interrupted by the global financial crisis. Although in 2014 many metal commodity prices are under pressure globally, and access to financing for exploratory activities has been reduced, the sector shows signs of being in good health. Few industry insiders doubt that, despite this slight downturn—and some issues with new tax initiatives—the Mexican mining industry remains as vibrant, optimistic, and economically vital as ever. According to the Mexican Ministry of Economy, FDI in Mexican mining totaled just over $3.0 billion in 2013, with mineral exports in Q12014 worth $440 million. Mexico is generally considered to be one of the most attractive and accessible destinations for mining and mineral exploration companies in the world, and this shows no sign of changing.

According to data from the Mexican Social Security Institute, approximately 334,000 people work in Mexico's mining sector, and more than 2 million are indirectly employed by it, which makes it the country's fourth largest industry in terms of US dollar income, ranked only behind automotive, oil, and electronics. In June 2013, the Mexican government reported that employment in the mining sector had experienced growth of 3.1% YoY. Mining work also paid 36% better than jobs in other sectors.

The most significant mining states are Zacatecas, Sonora, Chihuahua, Coahuila, and Durango. With respect to metals and minerals, silver and gold are the most prominent elements, followed by copper, zinc, and lead. In 2012, Mexican silver production amounted to 158.6 million ounces (4,496 tons) resulting in Mexico becoming the largest producer of silver in the world, a distinction that continues. The largest silver producing states were Zacatecas, which produced 46% of the national total, Chihuahua at 18%, Durango at 10%, and Sonora at 7%. The non-metallic minerals category is dominated by cement production and coal extraction. The most important coal producing regions are the Sabinas, and the Fuentes-Rio Escondido basins of north-central Coahuila: these produce 90% of Mexican coal.

Under the Mexican constitution, minerals are part of the national heritage, which functionally means that the exploration for and extraction of minerals has precedence over any other use for land. According to Camimex, the Mexican mining chamber (Cámara Minera de México)—an industrial organization that represents private industry to the government and advocates sector growth and development—with the exception of hydrocarbons, radioactive materials, and salt, Mexican law permits up to 100% private ownership in the exploration, development, and production of minerals. Exploration concessions are granted for six years and are not renewable. There are no limits for mining concession permits. Production concessions are awarded for 50 years and are renewable for a similar period.

TAXING TIMES

Despite its agreed upon importance for the national economy, the mining sector has proven to be a point of political contention in recent years. In 2013 a package of tax reforms proposed by the government, which included a 7.5% charge on resource companies, and as much as 8% for gold, silver and platinum mining, was approved. Representatives of the mining industry are concerned, and fear that the implementation of these taxes will see investment in the country's mining sector drop off dramatically, with major companies such as Canada's Goldcorp and the domestic giant Grupo Mexico warning that they may need to re-locate. According to Rosalind Wilson, the head of the Canadian Chamber of Commerce's mining task force in Mexico, the large concerns fear that, "Mexico is completely pricing itself out of the market." José Jaime Gutierrez Nuñez, General Director of the Grupo Minero Bacis, told TBY that; "This new tax has brought a decrease in the overall volume of activity in our company and the sector in general. Political forces did not take into account that prices in the mining and energy industry are cyclical, something we have already seen with a recent drop in the price of gold, silver, and other commodities. The positive side of the coin is the great energy and mining potential of Mexico in terms of the availability of resources." There is currently still heated debate on all sides regarding the implementation of the taxes, and in 2014 the issue remains unresolved.

THE RARE EARTH EFFECT

According to Mexico's National Geological Survey (SGM), global demand for rare earth metals in 2016 will reach 160,000 tons, with China expected to produce up to 80% of that demand, which leaves room for other well-positioned players to enter the market. Mexico's Secretariat of Economy will begin funding explorations projects to locate deposits of rare earth metals. Mining conglomerate Grupo Mexico, the country's largest mining company, is considering expanding into rare earth metals, a group of elements of increasing importance in a variety of industries including green technology, defense systems, consumer electronics, and high-tech applications. The mining group has announced plans to begin operations in Sonora and Chihuahua states, which have already proven to have economically viable rare earths deposits. Over the coming decade, the group plans to expand further south into Oaxaca and Chiapas. At the moment 95% of the world's rare earth metals come from China; Mexico predicts it might have enough rare earth metals within its borders to expand to hold 2% of the global market. While the precise amount of rare earth deposits Mexico may have it is not yet known, the country is believed to have vast underwater resources off its west coast. Deep-sea mining, however, is unlikely to replace land-based mining, experts believe, but they add that it could alleviate the fear of shortages and challenge China's virtual monopoly on rare earth metals production.

GREENING THE PROCESS

The mining industry has always been beset by questions of environmental sustainability and concerns over pollution and clean production. Mexico has worked consistently to balance environmental and economic policies, and has well-established mining laws. The federal government has passed mandates and laws to promote sustainable development and environmental protection through the Secretariat of Environment and Natural Resources (SEMARNAT). SEMARNAT attempts to specifically manage the following areas related to the mining sector: assuring the conservation of ecosystems and biodiversity, the prevention and control of pollution, the effective management of water resources, and action to forestall climate change which might be a side effect of intensive mining. With increases in international investment, it has been important for the Mexican authorities to bring in new regulations that are in synch with globally agreed upon standards. SEMARNAT has stated that it aims to align its policies to internationally accepted standards so exploration and mining activities would have a reduced impact on the environment.

Mining investors naturally follow debates on environmental regulations very closely. Under SEMARNAT, mineral exploration and mining require a number of environmental permits and authorizations to conform to the statutes of the general environmental protection laws, starting with a preliminary environmental impact statement for all major activities or projects. Besides environmental permits and operating licenses, the other necessary permits for any mine or plant include clearances for water usage, water discharge, land use, the use of explosives, and hazardous materials handling. Through the continued work and efforts of both the private and public sectors, Mexican mining seeks to be clean and green.