How Mexico reclaimed its mantle as a top mining nation

“There is support for mining politically, the geology is excellent, the people are incredibly friendly and the food is delicious.”

With these superlatives, consulting geologist Peter Megaw sums up why he is still working in Mexico after almost four decades, despite frequent drug-related violence and anti-mining protests. Megaw, president of International Development and Exploration and co-founder of MAG Silver (MAG-T, MVG-X), is an expert on Mexican geology and has been instrumental in the discovery of several silver deposits there.

His colleagues in the industry must agree that the security risk is worth it. Mexico attracted more exploration spending than any other Latin American country in 2012, according to Halifax-based SNL Metals Economics Group, capturing about 6% of the total worldwide non-ferrous metals exploration budget of $21.5 billion.

Mining companies were expected to invest $7.6 billion in Mexico in 2012, more than double what they spent in 2010, according to the Mexican mining chamber. Recent mergers and acquisitions (M&A) activity has included Primero Mining’s (P-T, PPP-N) takeover of Cerro Resources (CJO-V) and Coeur d’Alene Mines (CDM-T, CDE-N) besting First Majestic Silver (FR-T, AG-N) in its bid for Orko Silver (OK-V). And more M&A is likely to come. At least three producers — Fortuna Silver Mines (FVI-T, FSM-N), silver; Capstone Mining (CS-T), copper; and Agnico-Eagle Mines (AEM-T, AEM-N), gold — have said they are considering expanding their portfolio of projects in Mexico.

The attraction is partly the result of strong precious metal prices. Mexico is the world’s top silver producer, and cracked the list of top-10 gold-producing countries for the first time in 2011. Although prices have fallen hard this year, silver was trading at US$30 per oz. and gold at US$1,657 per oz. at the end of 2012, compared to US$17 and US$1,088 three years earlier.
At the same time, the country is relatively underexplored for precious and other metals.

“Geologically, there is no better place on earth for silver, and there are emerging gold regions as well,” Megaw said, as he was making his way from Durango city to Excellon Resources’ Platosa property on the carbonate replacement deposit (CRD) belt in Durango.

La Platosa is a case in point. Excellon boosted the number of drill rigs on the project from two to five recently because the company believes it is on the verge of discovering the CRD source of the high-grade mantos currently in production. CRDs are highly desirable exploration targets because they tend to be large (averaging 10–15 million tonnes), high grade (up to 600 grams silver per tonne and 6 grams gold with zinc, lead and copper by-products) and easy to process.

With resources averaging more than 800 grams silver, La Platosa is already the highest grade — and one of the lowest-cost — silver mines in Mexico. The mine is expected to produce 1.5 million oz. silver in 2013, up from 1.1 million oz. in 2012. Cash costs ring in at about US$5.31 per oz. after lead and zinc by-product credits.

Likewise, Fortuna — a relative newcomer to Mexico — is investing heavily in both exploration and expansion at its San Jose silver-gold mine in Oaxaca, which reached commercial production in September 2011. Fortuna expects to spend $7 million to 8 million on surface and underground exploration on concessions around the mine site this year, and will boost silver equivalent production to 4.6 million oz. by increasing the mining and processing rate to 1,500 tonnes per day.

And in the Guerrero gold belt, an emerging gold-mining district in the south, exploration is booming. Expanding gold deposits along the 55 km belt include: Esperanza Resources’ (EPZ-V) Cerro Jumil deposit, Newstrike Capital’s (NES-V) Ana Paula project, Torex Gold Resources’ (TXG-T) Morelos deposit and Goldcorp’s (G-T, GG-N) Los Filos mine, which became the first deposit along the belt to go into production in 2008.

How did a country with such a rich mineral endowment and 500-year mining history remain so underexplored for so long? Mexico’s approach to foreign investment during the second half of the twentieth century is largely responsible. From 1961 to 1991, the mining law stipulated that mineral assets must be at least 50% owned by Mexican companies. At the same time, there was little incentive to explore because of low landholding fees and rich, long-lived deposits that just kept on churning out metals.

When the law changed to allow 100% foreign investment and a sliding scale of land payments to encourage exploration, Canadian companies flocked back to Mexico. “The new law caused a substantial liberation of property,” Megaw says. “[Foreign] companies came back to the outcrops they’d been thrown off of — metaphorically speaking — thirty years before. But for the first five years, people were going back and knocking on the same outcrops.”

It wasn’t until Teck Resources (TCK-T, TCK-N) made a blind massive sulphide discovery at the San Nicolas deposit in central Mexico in 1996 that the country’s huge potential for buried deposits was recognized. But even as Teck was excitedly pulling core from the game-changing VMS deposit, another setback was looming. In 1997, the Bre-X scandal virtually halted exploration in Mexico until about 2003, when precious metal prices started inching up and investors returned to the market.

Since then, several buried mineral deposits have been discovered using modern exploration techniques, including the high-grade silver veins on MAG’s flagship Juanicipio property in Zacatecas. MAG and partner Fresnillo recently completed a preliminary economic assessment (PEA) for Juanicipio that outlines annual production of more than 10 million oz. silver from the veins over a 15-year mine life.

But despite their exploration success, MAG, Fortuna and Excellon have all been targeted by non-governmental organizations that accuse them of compromising local water supplies, clamping down on legitimate protest and, even worse, inciting violence. There have been three recent murders in the town of San Jose del Progreso where Fortuna operates, and late last year two protesters who had opposed MAG’s Cinco de Mayo project in Chihuahua were killed. Both MAG and Fortuna say the deaths have nothing to do with their projects, and everything to do with existing conflicts within the local communities.

“In San Jose, we have longstanding struggles between families and political groups that have always been there,” says Jorge Ganoza, president and CEO of Fortuna. “When we walked into the arena, all of a sudden the conflict became visible to the rest of the world because we were a foreign mining company. It was in the best interests of the conflicting groups to use us to give relevance to their struggle.”

As for the environmental concerns, both MAG and Fortuna deny statements that they are damaging water supplies. MAG’s Cinco de Mayo project is still at the exploration stage and nowhere near production, and they say that some of the claims about the San Jose mine are simply untrue.

“The allegations are that: we have an open-pit mine — we have an underground mine; that we use cyanide — we do not use cyanide; and that we are using water from the aquifer — we do not use water from the aquifer,” Ganoza says.

Last November, landholders from the local community of Ejido Benito Juarez voted at an assembly meeting to expel MAG from its Cinco de Mayo property and enforce a 100-year mining moratorium over the a
rea. The assembly was organized after anti-mining protester Ismael Solorio Urrutia and his wife Manuela Solis Contreras, both members of the grassroots farmers’ movement El Barzon, were shot dead as they were driving along a main highway.

“[Solorio Urrutia] was a tough negotiator, but he was a fair negotiator and he was someone we had a good working relationship with,” Megaw says, who is a director at MAG. “Beyond the business reasons, we were sorry for personal reasons that this happened.”

Drew Martel, MAG’s manager of investor relations, says the company expects the government to nullify the results of the assembly vote because the meeting was called illegally, not everyone was invited and there is evidence that some signatures were forged.

Still, Mexico is at risk of deterring mining investment — just as Colombia did until recently — if the violence continues at the current rate, says Jorge Neher, the Latin American leader of Norton Rose’s infrastructure, mining and commodities practice.

“If anything is affecting investors in Mexico right now it’s the security situation, which has been deteriorating for the past ten years,” Neher says. “You can have a friendly business attitude and prospective territory, but if you cannot operate safely, companies are not going to want to be there.”

According to the Fraser Institute’s annual survey of mining companies for 2011 to 2012, more than 40% of respondents said the security situation was either a strong deterrent or a reason not to invest in Mexico at all.

Neher says that, from an investment standpoint, the security issues are weighed against Mexico’s reputation as one of the most desirable mining jurisdictions in Latin America, with straightforward mining and exploration regulations, no royalties on production and a relatively quick permitting process.

Ganoza says Mexico’s approach to mining would be more effective — and may even help quell anti-mining sentiment — if income taxes from production were evenly distributed among federal, state and community coffers, as in the case of Peru, where Fortuna runs its flagship Caylloma silver mine. Currently, mining taxes go directly to the Mexican central government and are redistributed from there.

Under recently elected president Enrique Pena, the national government is moving to institute a new 5% royalty on pre-tax mining profits as a way to benefit the country’s economy, with much of the new tax haul to be distributed directly at the state and municipal government levels.

In the meantime, several companies are recording record production from their Mexican operations. First Majestic Silver, which operates five mines in the country, tabled its highest-ever production of 9.1 silver-equivalent oz. in 2012, while Alamos Gold (AGI-T, AGI-N) reported record annual production of 200,000 oz. gold from its Mulatos mine in Sonora.

Financing and M&A activity in Mexico is also in record-breaking territory. Last October, Torex Gold Resources (TXG-T) raised $380 million in stock and warrants, the largest mining equity offering on the TSX in 2012, to develop its Morelos project. The deal was preceded by one of the largest M&A deals of the year, Pan American Silver’s (PAA-T, PAAS-Q) $1.1-billion purchase of Minefinders to strengthen its Mexican production portfolio. Robust development projects are expected to keep attracting investment in 2013, as projects in many other locales wither on the vine.

As for finding the new mining districts of the future, Megaw says the western margin of the northwest-trending Sierra Madre Oriental that has been pierced by magmatic and volcanic rocks of the roughly parallel Sierra Madre Occidental is highly prospective for the type of high-grade silver-lead-zinc deposits he seeks.

“That’s where the really big deposits have been found historically,” he says.

“Windows of basement show up here and there along these belts for hundreds of kilometres, but there is all this covered ground in between. That’s where we have had success finding things.”

— Virginia Heffernan is a freelance writer specializing in mining issues, and a principal of Toronto-based GeoPen Communications (www.geopen.com).

This story was originally published on www.miningmarkets.ca.