New Mexican rules attract foreign firms

While it ranks as the world’s largest silver producer, Mexico is thought to be highly prospective for porphyry copper and bulk tonnage gold deposits which geologists say could be located by technology which wasn’t available in the 1960s.

As a result, Mexican President Carlos Salinas de Gortari’s recent decision to declare his country open for business has not gone unnoticed in the board rooms of North American and international mining firms.

Confident that they can now control their Mexican assets without unwanted government interference, majors and juniors alike are taking a new look at a geological environment that is still relatively unexplored.

Those with long memories recall porphyry copper deposits which were rendered unattractive by a net smelter return tax introduced after the porphyry copper rush of the 1960s when gold was trading at US$35 per oz.

The new attitude towards foreign investment has persuaded Noranda (TSE) and Placer Dome (TSE) to open exploration offices in Hermosillo, capital of the northwestern state of Sonora. Amax Inc. (TSE) of New York is setting up shop in Mexico City while attempting to register a Mexican subsidiary. American Barrick Resources (TSE) is also in Mexico looking for a deposit to match its Goldstrike mine under an option agreement with Chutine Resources (VSE).

According to figures compiled by Ainsworth-Jenkins Holdings Inc., a Vancouver-based consulting firm, those are just five of the roughly 30 foreign mining firms currently active in Mexico.

“It seems like everybody and his dog is moving down there,” said Terence McKillen, vice-president of exploration for Campbell Resources (TSE) which has maintained a presence in Mexico since 1956.

The spark behind this activity is the Mexican government’s recent decision to allow foreigners to effectively control 100% of local companies for up to 12 years from the first sale of mineral products by that company. Previously, they could purchase a maximum of only 49%. A reduction in the top marginal tax rate to 35% from 60%, combined with the Mexico, U.S., Canada Free Trade talks are also catching the attention of international mining concerns.

“We feel there is a great willingness on the part of government to change things and that has encouraged people to go down there,” said McKillen, who likes the fact that Mexico is much closer to home than Brazil or Chile.

“Essentially, Mexico has given foreign investors the same rules to play with that they enjoy in other countries,” said Vancouver mining consultant Ben Ainsworth. The withholding tax on dividends has been removed and the production tax on net smelter royalties, which made many of the lower grade copper deposits uneconomic, has also been reduced.

Although mining companies are at work in Chihuahua and Zacatecas, much of the current exploration activity is centred in Sonora where the geological characteristics are similar to those of Carlin, Nev.

It is there that Toronto-based Chutine and American Barrick are pooling their knowledge of the Mexican scene and in sedimentary-hosted gold deposits at the Amelia properties near Magdalena. Under an agreement announced in February, Barrick can earn up to a 75% interest in the Amelias after it has spent $3.5 million on an exploration program that includes 33,000 ft. of reverse circulation drilling this year. Initial phase of drilling is to be completed by May 31.

Through its Mexican subsidiary, Cia. Minerales de Sotula, Toronto-based Campbell Resources has rights to 500,000 acres in Sonora where its small San Luis and Sonora II mines are located. Campbell is no stranger to the local mining scene, but the new foreign investment rules have persuaded Campbell to expand its ambitions beyond the 10,000 oz. it expects to mine this year. When he was interviewed recently by The Northern Miner, McKillen was attempting to obtain Mexican financing for the company’s Washington copper deposit.

McKillen is also waiting for Noranda’s 40% owned Mexican affiliate Minera Las Cuevas to complete a feasibility study on the 30,000-acre La Colorado gold project where minable open pit reserves stand at 1.2 million tons grading 2.26 grams gold per ton and 5.89 grams silver. Owner of the world’s largest fluorite deposit, Las Cuevas can earn a 70% interest in La Colorado by completing a positive feasibility study by August 30. But rumor has it that crews working hard to finish on time may not meet the deadline, in which case Las Cuevas may have to negotiate for an extension on the contract.

Bill Mercer, Noranda’s manager for Latin American operations says Noranda and Cuevas will spend about $2 million this year. “Our objective is to joint venture with them on gold and silver projects and look for porphyry copper on our own,” said Mercer.

A spokesman for Amax’s wholly owned Rosario Resources said the company is attempting to register in Mexico while opening a small office in Mexico City. Through 40% owned Cia. Fresnillo, Rosario Resources holds a big stake in Mexico’s largest silver producer. Last year, Fresnillo extracted about 17 million oz. silver from four mines in the state of Zacatecas in central Mexico.

But like Placer Dome, Amax hadn’t decided on either a work program or exploration budget when this article was being prepared.

Placer Dome already owns a 49% stake in the Real de Angeles silver-lead-zinc mine (MRA) in Zacatecas where production increased in 1990 to 9.7 million oz. from 8.7 million the previous year. Placer Dome was able to increase its silver output by modifying the mill and hauling more ore from an operation that can churn out an ounce of silver for US$1.65. Silver traded recently at just over US$4 an oz.