Investment Dollars Flow Into Mexico

Monterrey, Mexico — Mexico’s long-neglected mineral reserves are set to get a historic boost over the next few years with record levels of mining investment, making Mexico the world’s number two destination for mining funds, behind China.

“We estimate an investment of almost fifteen billion dollars (US) in the six-year term of President Felipe Calderon,” says Norberto Roque, head of mining planning at the Mexican finance ministry.

But miners are worried about squandering the huge interest in the copper, gold, silver and zinc-producing nation, as labour actions, high energy costs, a lack of fiscal incentives, bureaucracy and a growing anti-mining movement threaten Mexico’s progress.

Most experts see Mexico’s potential as huge, with only a third of country so far explored, despite the high number of juniors roaming the country.

Mining companies in Mexico, a major oil exporter to the United States, say they struggle against a cultural perception in the country that mineral exploitation is low on the economic agenda.

They are keen to point out that Mexico, home to one of the world’s largest copper mines, Grupo Mexico’s (GMBXF-O, GMEXICOB-M) Cananea, generated US$7 billion in mineral and metals production last year, with copper output making up 40% of that, and accounting for 3.6% of gross domestic production.

Indeed, the country is host to miners such as Teck Cominco (TCK-T, TCK-N), Agnico-Eagle Mines (AEM-T, AEM-N), Frontera Copper (FCC-T, FRCPF-O) and Gammon Gold (GAM-T, GRS-X).

“We are not a minor economic activity, we have a similar presence to more representative sectors in the country like tourism or remittances,” says Xavier Garcia, president of Mexico’s mining chamber and a senior executive at the country’s top miner, Grupo Mexico.

Much of the investment is expected to come from Grupo Mexico, which plans to spend US$4 billion over the next five years to increase annual production at Cananea to 438,000 tonnes copper. That would make it the world’s fourth-largest copper mine, after Chile’s La Escondida, Chuquicamata and El Teniente.

The company also plans to build a major new copper mine in northern Mexico, on the Baja California peninsula. The El Arco project, which was stalled for years by low mineral prices, is set to produce 190,000 tonnes copper a year from 2012 with total investment at US$1.75 billion, including a power generator.

The project hosts a resource of some 170 million tonnes of oxide material grading 0.56% copper and 846 millions tonnes of unoxidized material grading 0.51% copper.

The plans are part of Grupo Mexico’s strategy to double its total production, including its Peruvian mines, to 1.3 million tonnes copper a year by 2012-13.

Grupo Mexico is also developing the Buenavista zinc mine in northern Sonora state, home to Cananea and its neighbouring La Caridad copper mine and smelter, as well as the Angangueo mine in central Michoacan state.

Goldcorp’s (G-T, GG-N) Penasquito gold project in Zacatecas, central Mexico, is also responsible for a large part of the investment drive in Mexico. The company is plowing US$1.2 billion into the mine, which will be the largest gold pit in the country and should begin production in the fourth quarter of 2008. Goldcorp expects heap leaching of oxide ore to begin first, with a sulphide ore milling and flotation operation up and running by late 2009.

Goldcorp eventually hopes to annually mine 22.8 million oz. silver, 387,000 oz. gold and 137,000 tonnes zinc from the pit, which is expected to have a life of 17 years. Proven and probable gold reserves at Penasquito are 13 million oz., with silver reserves at 864 million oz.

Meanwhile, Gammon Gold started production this year at its Ocampo gold-silver mine, in northern Chihuahua state, and is exploring Chihuahua at its Guadalupe y Calvo site. The latter project contains inferred resources of 1.1 million oz. gold and 45.6 million oz. silver.

Mexican silver miner Industrias Peoles (IPOAF-O, PENOLES-M), the world’s top silver producer, has investment plans too, setting aside US$35 million over the next two years, while exploration is on the rise.

Juniors such as Exmin Resources (EXM-V, EXMFF-O) are working with Peoles in the Sierra Madre gold belt in northwestern Mexico, while Endeavour Silver (EDR-T, EXK-X) has ambitious plans to use Mexico to catapult it from a small-cap miner to a major silver producer. Endeavour spent US$6 million this year on diamond drilling at its four silver projects in Mexico and is expanding its two mines, Guanacevi, in northern Durango state, and Bolanitos, in the central state of Guanajuato.

“We anticipate that Endeavour’s numerous exploration programs will continue to bear fruit in Guanacevi and Parral and we’re looking forward to the start of drilling at Bolanitos,” said company chief executive Bradford Cooke in a recent statement. “While the company has been quiet in recent months on acquisitions, that should change shortly.”

But as forecasts for Mexico’s mining industry look promising, some are warning of troubles ahead. Grupo Mexico’s labour problems at Cananea, where workers have been on strike since July for the second time in two years, are a concern to investors. The Mexican government faces criticism that it is not doing more to create an attractive environment for miners. In a survey by Canada’s Fraser Institute measuring the attractiveness of different countries for mining, Mexico slipped 22 places in 2006-2007 to 28th place out of 65 mining nations from the year before. Its mineral resource potential, within current regulations, has fallen 12 places.

While Mexico’s miners have not suffered from mining royal- ties, as in Peru and Chile, or drastic mining reforms, as in Venezuela and Bolivia, the combative nature of the country’s mine union, red tape and high energy costs are weighing.

“In other places where Peoles has a presence, like Peru and Chile, energy prices are lower and governments give greater support for exploration,” says Peoles spokesman Luis Rey.

Mexico lacks a mines ministry at the federal level and the country has no fiscal stimulus programs such as tax breaks for junior miners and new exploration areas. Infrastructure is also lacking, which drives up the price of developing a mine, while land titles are often not registered, causing community disputes.

Mexico also faces a shortfall of some 7,000 mining engineers after years of low mineral prices, while few universities offer geological engineering courses and dropout rates are high.