by James Crombie
Mexico’s chief mining coordinator bounds across an expansive corner office with views of the potholed, overcast and partially excavated western hills of Mexico City, rolling up shirt sleeves having swiftly removed jacket and cufflinks.
“We are fighting against time – the time for mines is right now,” Norberto Roque, Mexico’s general coordinator of mining, tells LatinFinance in an exclusive interview. “Prices are at a very good level.”
Behind Roque, topping a pile of baseball caps on a burdened corner stand is a white hard hat and Roque seems ready to don protective clothing, jump down a mine and start digging. An elegant bright orange tie alludes to the fact, with its miniature miner’s hat, pick, and shovel motifs.
Mexico was ranked best in the world in The Fraser Institute’s latest annual survey of mining companies, which polled approximately 372 exploration, development, and other mining-related companies around the world. It came top for mineral potential, assuming current regulations and land use restrictions.
“We are the biggest recipient of mining investment in Latin America,” says Roque, who sees the main rivalry coming from Peru, Chile, Brazil and Argentina. “There’s a lot of competition and for that reason, we have to work very fast to maintain our level.”
Roque speaks rapidly in English and Spanish about the need to seize the day. “Mexico has a very good tradition in the mining sector,” says the official. “Less than 25% of the territory has been explored – the opportunity is still there.”
Mexico expects to get $3.3 billion in mining investment this year and forecasts more than $20 billion overall in the Calderón sexenio, which ends in 2012. It got $2.15 billion last year, and has already exceeded that, with $2.18 billion in January to August 2008.
“The industry is going through a good period, above all at the level of investment,” says Rodrigo Heredia, mining analyst at Ixe Casa de Bolsa. “Mexico is very rich in some metals and there’s been a large amount of investment in new projects by local and foreign companies.”
Roque predicts $3.31 billion of investment in the full 12 months of this year, rising to $3.55 billion in 2009. He pins this increase on heightened demand for metals and a more attractive level of competitiveness in Mexico. The country is also very actively involved in exploration, a phase that typically leads to much bigger investment in mine construction, extraction and processing plants.
In the first half of 2008, when many sectors in Mexico were depressed, foreign mining investment rose 38%. “It’s also one of the sectors where employment has grown most,” adds Roque. Roughly 40% of the investment comes from abroad – 77% from Canada – while some 80% of projects are in the exploration phase. “We think that this could be maintained,” says Roque, asked how the mix of local to foreign investment will change.
Most of the foreign capital comes from the Toronto Stock Exchange (TSE), while locals are raising cash in London, New York and Mexico. Roque notes that London and Toronto’s equity markets are much better developed for miners than Mexico’s bolsa.
However, Heredia says portfolio investors must be cautious about mining, which they can play in Mexico through majors like Peñoles, Fresnillo, Minera Autlán and Grupo Mexico. “There’s been a revision downwards in multiples,” says Heredia. “Apart from this structural change, this is a time of much uncertainty. Some miners and metals have good fundamentals, but you need to be very careful.”
Others looking at the region say size matters for investors. “Generally speaking the mining companies in Mexico don’t have the scale that you see in Brazil,” says Jorge Beristain, head of Americas metals and mining research at Deutsche Bank. He adds that the metals in Mexico lend themselves more to extraction by smaller cap miners.
“Mexico has not attracted a huge amount of foreign direct investment in large scale mining, as Brazil has,” says Beristain. He refers to Anglo American’s recent purchase of a stake in MMX for $5.5 billion and CSN’s proposed sale of Namisa as examples in Brazil.
Just 22 months in the job, Roque produces a wide array of data, charts, maps and endorsements from miners and consultants to support his case. Mexico is a major producer of copper, silver, gold, molybdenum, zinc and lead.
Among priorities is a system to modernize the administration of mining concessions. A web site that should be running by the end of the year will allow miners based anywhere in the world to access geological survey data and make a purchase. Concessions are listed at a flat mining rights rate per hectare, and online sales will be seamless, says Roque. The aim, he adds, is to streamline the process and attract more investment.
Key to the sector’s development is a strengthening the supply chain, including equipment and energy, much of it coming from small and medium sized enterprises (SMEs). The Fideicomiso de Fomento Minero (FIFOMI) aims to aid established Mexican SMEs with financial and technical support. Roque was director of FIFOMI in 2002-2003.
The fund plans to make loans totaling $500 million equivalent this year. Roque says it will rise to $680 million in 2009 and hit $1.1 billion in size by 2012. Loans to mining SMEs are up to five years’ tenor with an average size of 1 million pesos, priced basis TIIE.
Securitizing the Portfolio
FIFOMI has lent over $300 million so far this year. Roque describes the loan portfolio as “healthy” with no problems. To raise funds, the Fideicomiso recently did a 300 million peso issue of short term certificados de credito from a 1 billion peso program, through Scotiabank.
“Next year, we’ll do not just certificados de credito, but a securitization of the portfolio,” says Roque. “Since the government is not putting in money, we’ll use the markets to get liquidity for the fund to be able to lend more.”
The Fideicomiso will next year target issues of 500 million to 1 billion pesos each, with a three or five-year tenor, according to market conditions. “Depending on the demand for our credit, we need to be parri passu with the issuance,” says Roque. He adds that the deals will not carry a government guarantee.
The economy ministry is also working on setting up a $100-$120 million private investment fund to take temporary minority stakes in mining companies and raise cash through equity in Toronto, or debt and/or equity in Mexico.
“We will finish the study this year and if everything is favorable, we will launch it in 2009,” says Roque. “We are looking for competitiveness and markets development for private companies.”
The government will keep a 20% stake, with the rest coming from private sources. This includes $20 million from Corporation Mexicana de Inversiones, a fund of funds partly owned by Nafinsa.
“The government will catalyze participation from other economic agents,” says Roque. The new vehicle will invest on a medium term basis. “Depending on the project, it could be five to seven years,” says Roque, talking about commitment period.
According to Roque, there are more than 600 mining projects in Mexico, many of them supported by the TSE. Analysts say that sector consolidation, especially among junior miners, is inevitable.
In September, there were strong rumors that major miner Autlán was being sold, with Brazilian mining giant Vale among the bidders. But Roque seems unfazed by this activity, as long as the underlying business is sound. “Companies right now change flag very often,” says the official.
Roque is particularly enthused about mining’s ability to create jobs and aid social development of communities that are often in remote parts of Mexico. He says that some new projects are helping bring Mexicans back home from the US. “We have to use the minerals to change the future of the people in these communities,” says Roque. “It’s more than a mission or a vision; it’s more a belief, a conviction of the whole team.”
Roque spends much of his time on the promotional leg of his mission, liaising directly with investors around the world. He touts the benefits of Mexico’s stable investment regime, attractive mineral potential, and supportive infrastructure for mining companies.
A big worry is the vulnerability of commodity prices to a downturn after several years of bull markets. But Roque is upbeat about the outlook for metals prices, based on the research he has studied.
“We have a lot of cushion to support the mines,” says Roque, who claims that Mexico has low production costs versus other LatAm nations. “It’s not high, and in some projects it’s lower than the international level.” Heredia says that power costs are moderate and labor is competitive versus other mining nations.
Beristain says that despite a recent pullback, the long term secular growth story in China should support metals prices. Deutsche has a copper price forecast of $3.65 a pound for 2009.
Analysts meanwhile fret over labor issues, amid longstanding troubles at the Cananea mine. “The flexibility of labor is behind that of other countries,” says Beristain. “It’s a barrier to entry.” Another challenge is completing the government’s ambitious infrastructure plan, which would support mining, says Heredia.
Roque refers to the stresses and strains of constant international travel while also focusing on his mission at home. But Roque, who has worked at the government for almost 30 years in various development roles, never once lets it appear that he is anything less than thrilled by the mining role.
“We have a great commitment to maintain Mexico as the number one place to do mining,” says Roque, sitting in front of a Mexican flag and framed portrait of president Calderón. “We want to make it very clear that bureaucracy is a thing of the past in this country.”
Roque claims to find this moment in Mexican mining the most exciting of his career. He is keen for mining industry participants to discover this for themselves. “Don’t ask me, ask investors,” he concludes. LF