Government engagement, rising commodity prices and new technology bode well for Mexico's mining sector

Over the past decade, commodities have experienced a bumpy road across the board. The fall in global prices in 2012 followed by the newly imposed royalty tax in 2014 and an increasingly unpredictable security situation in many of Mexico’s northern states severely impacted the industry. However, a spike in commodities prices throughout 2017 and 2018 has seen a jump in prices of several key metals mined in Mexico, with gold prices up by 15%, silver by 11% and copper by 23%, according to industry media reports. In 2017 some 467 new mining concessions were added to the country’s 25,000-strong portfolio, representing a total land area that comprises 11% of Mexico’s territory. Alongside this, direct employment related to the extraction of basic metals has jumped 8.1% since 2016 – a situation that bodes well for the industry.

Structural Government Changes

The relationship between mining and government has not always been smooth. In 2015 a controversial government policy introduced a 7.5% tax on all metals and an extra 0.5% on precious metals, which deeply impacted the sector and alienated some players.

However, a number of moves by government administrators look to address issues in the industry. In December 2016 the deputy minister of mining position at the Ministry of Economy was reinstated after 20 years of absence. Bringing on new deputy minister Mario Alfonso Cantú Suárez was intended to demonstrate that the federal government sees mining as strategic to its wider economic plan to further engage global investors. The re-establishment of the position is expected to strengthen communication channels between the public and private sectors, help resolve domestic disputes, and put more institutional weight behind the mining industry.

The government is also placing a greater focus on developing human capital, boosting technology usage and digitalising overall industrial processes. More Mexican Geological Survey services will also be allocated to exploration activities to give a long-term boost to the sector, accompanied by more detailed geological information on sites under development.

Adding to these changes, one industry body has been reinstated and another restructured. The Institutional Mining Group, which comprises all the federal agencies charged with drawing up regulations for the sector, will be brought back to ensure the most streamlined planning and institutional support is available for private actors. Meanwhile, the reorganisation of the Mining Trust, also known as FIFOMI, has been designed to provide more training and technical support to small and medium-sized enterprises while prioritising services dedicated to the production and distribution of raw materials.

Administrative changes are not without their challenges, however. These steps, while widely applauded, were taken four years into President Enrique Peña Nieto’s six-year term. The situation has contributed to some concerns regarding the change in leadership in December 2018, as the mining policy of the incoming administration of Andrés Manuel López Obrador remains to be seen. Despite uncertainty, a number of bright spots in the mining industry have popped up.

Lithium

With the drive in global demand for electric vehicles, lithium is becoming an increasingly valuable commodity. Late 2018 will see the construction of the $420m Sonora Lithium Project by Canadian firm Bacanora Minerals which will consist of an openpit mine and large-scale beneficiation processing facility. Citing the state’s mining vocation and the importance of lithium to the production of electric and hybrid vehicles, Jorge Vidal Ahumada, Sonora’s secretary of economy, told OBG, “Only one-third of Sonora’s territory has been explored, but it already accounts for 31% of all of Mexico’s mining production. If the state’s lithium reserves can be successfully exploited, this would have positive implications in the supply chains of auto manufacturers, not only for Ford in Hermosillo, but for all original equipment manufacturers based in Mexico and the southern US.”

Construction is set to begin in September 2018, with the completion date for phase one expected in early 2020. The plant will have an annual capacity of 17,500 tonnes with the option to double production to 35,000 tonnes. Bacanora Minerals established a longterm partnership with Japanese firm Hanwa for all lithium produced at the mine. With an estimated 200 years of reserves and operating costs of $4000 per tonne, the mine has the potential to transition Sonora into one of the world’s top producers of lithium.

New Technology

Other bright spots in the industry include the renewed focus of digitalisation. In a time of global uncertainty and sharp fluctuations in commodities markets, industry analysts have estimated overall costs could be reduced by 10% due to the implementation of digitalisation and automation. Initiatives at some of Mexico’s largest mines are expected to see technology playing a larger part of everyday operations in a bid to reduce overhead.

One such collaboration, involving the country’s largest mining group Grupo México and German multinational Siemens, has produced the country’s first intelligent mine, Buenavista del Cobre, in the northern state of Sonora. Through automation, as well as high-spec engineering, instrumentation and variable voltage, the world’s fifth-largest copper mine now includes a remote monitoring system, which centrally manages new mobile substations based on Grupo México’s needs, projected activities and overall site conditions. In addition to improving operations flexibility and reducing electricity costs, it will have wide ranging implications for productivity levels and the environmental impact of activities.

Tangible Results

Higher prices in certain commodities are boosting confidence in exploration activities and the sector’s long-term outlook. It is hoped that the structural government changes implemented in 2016 have catalysed a new era of engagement with the public sector, in spite of the uncertainty involved with the change of administration. “Exploration is growing significantly and within a few years is expected to produce tangible results,” Jesús Herrera, CEO of Detector Exploraciones, told OBG. “There are many more projects in the pipeline, and we hope the new administration plans to streamline its planning procedures and improve legal security to incentivise further mining developments.”

For an industry heavily influenced by political support, the level of engagement from the next federal administration will be crucial to its success. That being said, regardless of the national policy from 2018-26, both foreign and local stakeholders are likely to continue maintaining strong relationships with the respective state governments in terms of security, infrastructure development, and institutional and judicial assurance. Most importantly, Mexico’s vast underexplored territory bodes well for stakeholders, especially with global prices starting to pick up.

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The Report: Mexico 2018

Industry & Mining chapter from The Report: Mexico 2018

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