Mining Leaders Mexico 2013 by Miguel Camacho

In association with:

politics & Economy

GOLD

4 lead article: The Aztec Tiger

25 lead article: The Midas Touch

7 feature interview

29 feature interview

9 Enrique Peña Nieto, The King's Speech q&a: Ildefonso Guajardo, Secretary of Economy

11 leader insight

Horacio Bruna, From Los Filos and Beyond

31 q&a: Alejandro Aboumrad, Minera Frisco 33 project focus:

Publisher: Freestone Publishing Alma Miner, José Mártinez Gómez, AIMMGM

Field Research Country Coordinator: Majo Rosa Country Editor: Grant Morimura Sunderland Project Assistants: Mariana Nova & Sofia Soberón Headquarters Regional Editor: Mathew Youkee Production Editors: Samantha Eyler & Dipak Nayar Staff Writers: Narayan Buckley, Steffan Adams, Jesse Snyder & Emma Kate Crowley Art Director: Miguel Camacho Torres Design Assistant: Karen Montenegro Operations Manager: José Rincón International Media Coordinator: Karen Delgado Executive Directors Charlotte de Casabianca & Raluca Monac

12 q&a: Rosalind Wilson

For subscriptions and sales info, visit:

34 project focus: El Gallo 35 Lead issue: Rising Royalties 37 Gold exploration: The Frontier 38 company focus

Canadian Chamber of Commerce in Mexico

13 ANALYSIS: (Im)Pacto por Mexico 15 leader insight Riverside Rosources

39 q&a: Morgan Poliquin, Almaden Minerals 40 Market focus: Drill Sergeants Mario Cantú, Coordinator General of Mines

41 company focus

17 q&a: Humberto Gutiérrez-Olvera, Camimex 19 q&a:

Special thanks to: Rosalind Wilson, Pepe Martinez, Cesar Vazquez, Chris Warwick and ProMéxico Printer Delta Offset Diseño y Publicidad SA de CV

John A. McCluskey, Mulatos Mine

Tamino Minerals

42 box: Stuck In The Middle Francisco Nicolás González, ProMéxico

43 ANALYSIS: A History of Violence

21 Article: Tariff Battlers

45 project focus: Metates

22 leader insight

46 company focus

WWW.MINING-LEADERS.COM facebook.com/Mining.Leaders Twitter.com/MiningLeaders issuu.com/mining-leaders

Radek Divis & Said Hawayek, Austrade

23 q&a: Hector de los Santos & Vicente Herrera,

Cayden Resources

47 PROJECT ROUNDUP

Canmex Mining

Mining Leaders

base metals

108 market focus: Water

76 lead article: Base Matters

109 company focus: Weir Minerals

79 feature interview

110 Q&A: Time Machines 111 company focus: Grupo Sincom 112 BOx: MythClusters 113 mts roundup

Xavier García de Quevedo, Grupo Mexico

silver 49 lead article: The Heart of the Plata 54 map: Silver Mines 55 feature interview

81 project focus: Velardeña

115 company focus: Ascendum 116 q&a: Jesús Herrera, Detectores Exploraciones

82 article: The Missing Zinc 83 analysis: What's Stopping China? 85 company focus

Consultancy, financial & legal services 117 lead article: Streaming Ahead 121 Q&A

Chris Warwick, Surfing Silver Waves

57 q&a

Chris Frostad, Virgin Metals

86 project focus: Promontorio 87 Lead Issue: Power Plays 89 project focus: Las Cuevas

Rick Rule, Sprott Global Resource Investments 123 q&a

90 market focus: Community Relations Octavio Alvídrez, Fresnillo Plc

59 q&a: John Smith, Silver Standard Resources 60 project focus: Nuestra Señora 61 project focus

mining Equipment, technology & services 91 lead article: The New Alchemists 95 Q&A: Good Chemistry, BASF 97 project focus: Cananea Service Hub 98 q&a: Rafael Villagómez Contreras, Cominvi

Ron Tremblay, Levon Resources, Cordero

99 project focus

63 ANALYSIS: A Question of Integrity

125 leader insight: Dual-listing, Carlos Espinosa, TSX 126 project focus: SRK Consulting 127 leader insight: Peter Gianulis, Carrelton Asset Management

129 leader insight: Social Sciences, Manuel Ortiz, ERM

130 q&a: Evy Hambro, BlackRock World Mining Trust

65 project focus

131 Lead Issue: Adventures in Capital Raising Hermosillo Center

100 BOx: Iron Scam Jim Williams, Arian Silver, San José

Laura Cristina Díaz, DBR Abogados

133 market focus: Land Acquisition 134 leader insight

101 company focus

66 company focus: SilverCrest 67 feature interview

Mario Hernández, KPMG Servicios Perforación México

103 q&a: Enrique Ortega Nieto, SHB Mitchel Krebs, Cri du Coeur

ml recommends

104 company focus: Compañía Isdamar

69 project focus: Sierra Mojada

105 company focus: DNA Mining

70 project roundup

106 BOx: A Breath of Fresh Air

71 Lead Issue: Nature of the Threat

107 project focus

73 company focus: First Majestic Silver

135 lead article: The City & Beyond 137 hotels

74 project focus: El Herrero

139 entertainment 141 directory

WWW.MINING-LEADERS.COM

Permex Mazapil

141 advertisers' index

Mining Leaders is a trademark of Freestone Publishing Inc. Copyright Freestone Publishing Inc. 2013. No part of this publication can be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopied, recorded, or otherwise without the prior permission of Freestone Publishing Inc. Freestone Publishing has made every effort to ensure that the content of this publication is accurate at the time of printing. However, Freestone Publishing makes no warranty, representation, or undertaking, whether expressed or implied, nor does it assume any legal liability, direct or indirect, or responsibility for the accuracy, completeness, or usefulness of any information contained in this publication.

Mining Leaders

iii

politics & economy

lead article

THE AZTEC

TIGER I

Photo: Golden Goliath

n May 2013, Barack Obama wrapped up his latest round of diplomatic friend-visiting in Latin America. His sojourn to the United States' southern neighbor marked the first time that Mexico’s new head of state, Enrique Peña Nieto, would receive his US counterpart in the Distrito Federal since taking office in December 2012. Exasperated, like many Mexicans, by headlines about narcoviolence and insecurity, Peña Nieto and Obama seem to have agreed to talk up Mexico as Latin America’s new economic debutante: the Aztec Tiger. In the eyes of the two presidents, economic growth has replaced the war on drugs as the favored lens for discussing social and security problems. This was rather more of a public-relations picture than a realistic one, but much of Peña Nieto’s task as Mexico’s new leader lies in projecting a positive image both domestically and abroad—of himself, his party, and his country—long enough to channel the current optimism into improving the country’s reality. Mexico has indeed snagged much of Brazil’s limelight as the emerging regional powerhouse, but economic inequality, corruption and security need to be resolved before the country’s true potential is reached. Mining Leaders

lead article

$1.788 Trillion dollars: Mexico's GDP (PPP) in 2012

between the PRI, PAN and left-wing PRD, the day after the president’s inauguration. The Pact aims to eliminate legislative squabbling and pass 95 key reforms to enhance economic performance, democratic deepening, and citizen engagement in politics. However, only seven months later the Pact is already wobbling due to conflict with the PAN and regional elections looming on the horizon.

as overly burdensome labor laws and the country’s petroleum wealth that have dogged Mexican competitiveness, are now in the presidential crosshairs. Though controversial, such measures are necessary for Peña Nieto to achieve his campaign promise of 6% annual economic growth by the end of his six year term. The main issues in question include a widespread fiscal reform— featuring a proposed mining royalty— which is in the process of being ratified, along with the energy reform, which would open up the oil industry to private participation in order to shake up Pemex, the state oil company, and lubricate its sclerotic production.

Peña Nieto has barracked Congress with a series of reforms that shake-up delicate and often controversial, social issues. Mexico has a long tradition of leaning to the left and the postrevolution constitution was mainly drafted to protect and aid the common people. As a result, sensitive areas such

In terms of social as well as economic power, Mexico ranks among the biggest in the western hemisphere. Home to approximately 116 million people, Mexico boasts vast human and natural resources, 5 of the 25 best universities in Latin America, and a 2012 GDP of $1.788 trillion, the world’s 12th

Peña Nieto and Obama reach consensus to ˝talk up˝ Mexico as the Aztec Tiger

An important fait accompli behind Peña Nieto’s agenda is the Pact for Mexico, a political cooperation agreement signed

Government Approval 2012 - 2013 70 Approval

Disapproval

Source: Consulta Mitofsky

The clean-cut 46-year-old had to jump many hurdles to reach the presidential residence at Los Pinos—not least of which was convincing Mexican voters to give a second chance to his Institutional Revolutionary Party (PRI). Having ruled for seven uninterrupted decades, the party was defeated at the ballot in 2000 by the right-of-center National Action Party (PAN), and left with a reputation tarnished by corruption scandals. Once in office, however, Peña Nieto immediately endeared himself to the global press and investors with his infectious optimism for Mexico: Forbes listed him at number 54 on its list of the world’s most powerful and Time among its 100 most influential people. In the wake of his election, New York Times columnist Thomas Friedman called Mexico the “Comeback Kid.” Peña Nieto and analysts worldwide like to chime in chorus that Mexico now has both the potential and momentum to become a global power, and they are correct. But if the PRI wishes to redeem itself and validate the 38.2% voter confidence of 2012, Peña Nieto must make good on his campaign promises. Indeed, eight months into his mandate, the president has shown his commitment to overhauling delicate and controversial areas of Mexico, including education, labor unions and the state run energy sector, Pemex.

MAY 2012

JUN 2012

JUL 2012

AUG 2012

SEP 2012

OCT 2012

NOV 2012

DEC 2012

JAN 2013

FEB 2013

MAR 2013

APR 2013

MAY 2013

Mining Leaders

lead article

3.5%

Mexico's projected average GDP growth over 2012-2017

But the post-1994 economic and political framework, while amicable to business, investment and legislative logrolling, has made scant progress in resolving the country’s social problems. Mexico’s emphasis on solvency to guard against a repeat of the peso crisis has left little fiscal space for entitlement programs or social-development spending. In 2010, the World Bank estimated that a majority of Mexicans—fully 51.3%, or about 60 million people—lived below the poverty line, meaning more people live in poverty in Mexico than any other country in the Americas. With immigration reform becoming a major issue of debate in the US, net emigration on the world’s busiest border has fallen to zero, increasing the pressure to create jobs south of the Rio Grande. Mexico itself now has the largest informal economy in the OECD, implying very high social precariousness even for workers with jobs. Moreover, the country’s export-led growth strategy creates continual pressure to maintain rock-bottom wages in order to compete

Peña Nieto was criticized for the arrest of Elba Esther Gordillo (above), the national teacher’s union leader and a political opponent.

Post-1994 Investment and Exports in Mexico

15 10

5 15

-15 -20

Volume of exports of goods and services (% change)

-5 -10

0 19

These sunny statistics can be credited to the two-pronged economic strategy that Mexico implemented in the wake of the 1994 “tequila” crisis, when the government devalued its currency and set off investor panic, leading to recession and an IMF bailout. Mexicans chose economist Ernesto Zedillo as president in the 1994 elections, and he promptly set about rebuilding the country’s international creditworthiness with a strictly orthodox macroeconomic policy. During Zedillo’s term, Mexico also moved toward democratic consolidation and finally broke the PRI’s stranglehold on political power with the 2000 election of Vicente Fox, the PAN candidate. Since then the country has seen two peaceful democratic transfers of power between parties. Mexico now ranks 48th out of 189 on the World Bank’s Ease of Doing Business Index 2013, having improved

its overall position by 9.4% in eight years, while its investor protection score increased by over 70% (25 percentage points) since 2005. The second prong of the strategy was to jumpstart growth by embracing free trade. Today, the country participates in 12 FTAs with 44 countries, most notably NAFTA with the US and Canada. Mexico now sends about fourfifths of its exports north to the US. To reduce its dependency on the current US economy, it’s also emphasizing SouthSouth trade links to tap dynamic new markets. As a member of the Pacific Alliance, the country sits squarely alongside Chile, Colombia, and Peru on the more free market-leaning side of the “continental divide”, the Economist’s term to distinguish Latin America’s statist and market-led economies.

largest. The OECD projects Mexican GDP growing by an average of 3.5% over 2012-2017, outpacing the OECD average by more than a full percentage point. The country ranks as the world’s biggest silver producer, its fourth-biggest automobile and ninth-biggest oil exporter, while also a hugely popular tourist destination that attracted 190 million visitors in 2011. Mexico's proximity to the United States and factory wages hovering near the Chinese average, mean manufacturers are increasingly “nearshoring” and choosing it over China to build new factories.

10 5

Total investment (% of GDP, right axis) 0 Source: International Monetary Fund, World Economic Outlook Database, April 2013; Estimates start after 2012

Peña Nieto's PROMISE OF ANNUAL economic growth by 2018 with other low-cost producer nations, limiting social mobility. Mexico is now one of the world’s most unequal countries, with 37.5% of income held by the top 10% and the bottom fifth of the population earning less than 5% of national income. This economic precariousness, added to the country’s other headlinegrabbing problems with corruption and narcotrafficking, has corroded both the wellbeing of the average Mexican and the public’s opinion of their own government. Since 2006, about 70,000 people have died from drug-related violence. Furthermore, the NGO, Transparency International, ranks Mexico in the lower half of its Corruption Perceptions Index. Corruption problems are eating away at public support for Mexico’s democracy: Latinobarómetro reports that in 2011 only 40% of Mexicans believed that democracy is the best form of government, down 9% on the previous year. Meanwhile, the president has attracted criticism for the arrest of Elba Esther Gordillo, the national teacher’s union leader and a political opponent. But supporters of the move insist that Mexico’s gloomy last place in the OECD education tables, is caused in part by the union’s wild mismanagement of funds. Peña Nieto is also changing the terminology used to describe the darker elements of Mexico's situation. The phrase “war on drugs” is now anathema in public discourse; instead, the president discusses how economic growth can address “the violence” or “delinquency” by giving disaffected

young people real opportunities. Mexicans, exhausted with a decade of seeing their country portrayed as helpless in combating narcos, have welcomed this semantic shift with relief. On economic policy, the Pact for Mexico shifts emphasis away from an obsession with export competitiveness and towards internal competitiveness, aiming to break up “informal” domestic monopolies and create space for new growth and less costly services for Mexican consumers. For instance, in the Carlos Slim/Televisa-dominated telecoms sector that has left Mexico with the slowest and most expensive internet in the OECD. The lack of competition damages consumer wellbeing by an estimated 1.8% of GDP per year. Mexico’s economy has performed well in the last decade, but Peña Nieto’s commitment to seriously tackle the major structural issues behind the country make his 6% annual growth

election promise realistic. Though the Pact for Mexico may largely be a legislative stratagem, the new president has proven his political audacity by taking on the delicate issues that have kept the country uncompetitive, including the labor law, the Education Union, Pemex and Carlos Slim’s telecommunications empire. More importantly, Peña-Nieto is also sending orders down the chain to implement a royalty for the first time ever on the “untouchable” mining companies. Though the president is intensively looking at reforming the economy, Peña Nieto needs to reduce inequality and put an end to the violent crime that has plagued the country. In six years Mexico could see a significant transformation. And while the global market forces and the country’s reliance on the US could create some economic uncertainty, both Mexico and the outside world is bullish on the Aztec Tiger. Mining Leaders

feature interview

THE KING's SPEECh Mexico’s new President, Enrique Peña Nieto, has inherited a nation with grand economic potential, coupled with severe social problems. At his December inauguration, the head of state detailed his plan to leverage Mexico’s economic advantages and fulfill the country’s potential.

exico is entering a new chapter in its extensive history: one where solid democratic institutions, and competitive and inclusive electoral processes are commonplace. In the past, financial crises were frequent, forcing Mexicans to learn hard lessons and build solid democratic institutions, on which the new path of the country is set. It’s now up to us to take advantage of this platform, accelerate growth, and achieve the most important economic goal: improving the lives of Mexican families.

of great strategic importance and wealth. And it is now my privilege to lead it us into the future by strengthening our position on the domestic stage, while also becoming a global actor that trades and engages with the world. We want to elevate the quality of life for all Mexican families by creating a better country where FDI creates benefits for the investor but, more importantly, for the Mexican population as well. This wish to improve our citizens' quality of life is present throughout our country, and it is a desire that has strong momentum.

During my campaign, I promised 6% annual economic growth by the end of my six year term. Today Mexico is a country

My responsibility as president is to bring about this transformation. Doing so democratically is my ineludible

obligation. My vision to accelerate holistic and inclusive growth for the country is realistic and I will lead an efficient government that has one fundamental mission: to defend and authenticate the human rights which our constitution proclaims. To do so, I propose that my government works along five axes. My administration will be at the service of all Mexicans. Our greatest asset is human life, and so the first axis of my government is to create a peaceful Mexico. We will put all citizens and their families at the center of security politics. To achieve these results we will build a strategy for effective coordination

enrique peĂąa nieto

of all government entities to defeat delinquency and allow justice to prevail. Mexicans will return to peaceful towns, roads and cities without fear of losing life or liberty. We need to change the paradigm and understand that security can exist without injustice. In the Mexico I envision, there will be justice for all. With justice comes the second axis of my administration: the creation of an inclusive Mexico. We must continue the fight against poverty and reduce the inequality that unfortunately divides Mexicans. As a society we must work so that mothers and fathers have sufficient resources for their children. Our culture must evolve and become a cohesive, egalitarian society with a more pronounced middle class, which will be full of opportunities. We will stimulate the possibilities of the country through developing the talent, capacities and creativity of all Mexicans. In order to do so, the third axis of my government will provide quality education for all. The country that we can be will confront educational delays to meet the levels of those in developed countries. Our schools will cultivate free, responsible and dedicated individuals that will be citizens of Mexico and the world, but always in solidarity with their communities. My main preoccupation is that young, creative and entrepreneurial Mexicans have the knowledge and skills to successfully compete in the modern world. History shows us that industrial and technical revolutions come about at a dizzying pace and that those with the right scientific and technical tools will thrive. I believe in a Mexico that grows solidly and sustainably across all of our lands. To see this growth come to fruition, my fourth axis of government is building a prosperous Mexico. Nature has given us a wide range of resources. There was a time when our only option was to

El Ă ngel stands over Mexico City as a celebration of Mexican independence

exploit them and, by doing so, we failed to see other productive options that could generate larger benefits for the country. We will continue to exploit them, but in sustainable and innovative ways. A priority is adding value to the resources so they end up in the pockets of Mexicans today and tomorrow. At the end of the day, you are the owners of this wealth. Within the promise of accelerating growth, I envision us creating more competition in all areas. Increasing bank credit to finance strategic areas will foment the formal economy. The new government is determined to increase investment in infrastructure to strengthen our internal market, while also making Mexico more competitive globally. We must encourage, without delay or fear, all the motors of growth. This Mexico is within our reach, and it wonâ&#x20AC;&#x2122;t be a country that only looks inwards, but a country that keeps its promise on the most important humanitarian issues. Thus, the fifth axis of my administration will be making Mexico a responsible actor

at the global level, which sits at the table and encourages cooperation between nations. Mexico will embody modern and innovative diplomacy. Mexico must show stability in a convulsive world and act as a voice defending liberty, while also promoting justice and sustainability. These are the five axes of my government that culminate in my vision for a Mexico that is within our reach. If we can put aside animosity and create consensus we will see this Mexico emerge on the global stage. I would like to salute the political parties who have come together to be a part of the Pacto por Mexico. Our proximity is a sign that we can compromise to create large changes. All areas of the government have enthusiastically offered to participate in the pact, making us even closer to the goal. It is the time to come together on common proposals to reach a common destination. Through peace, justice, prosperity and respect for one another, we shall all be part of Mexico. Mining Leaders

q&a

DEMOCRATIZING

Ildefonso Guajardo Secretary of Economy

PRODUCTIVITY

Mexico's Secretary of Economy, Ildefonso Guajardo, has a crucial part to play in Mexico's mining law reforms and provides an insightful commentary on the sector's interplay with the wider economy, in both national and global terms. He explains the importance of free trade agreements in Latin America, while responding to Nobel Prize-winning economist Paul Krugman's criticisms of the Mexican economy. In the Pact for Mexico, the country’s mining law is scheduled for reform. What are the concrete proposals to alter the existing royalty payment framework? Reforms will primarily target federal mining law and economic competition law. I would also say that the changes behind mining are the culmination of many groups and trends looking towards a new chapter in the country's jurisdictional framework. Reform will unite a factious congress, which is the common denominator behind the three issues that merit the mining law reform. So first we must analyze all of the existing initiatives and then act as the president has instructed us: to address these three issues via reform. The first issue to consider is the fiscal nature of the proposed royalties. Reform would see royalties included in the mining law, rather than in the concessions fee system, as they are today. I believe the reform would create a new system of equilibrium between the fees and the alternative system of royalties currently contributed by miners. We need to be careful when saying mining companies in Mexico don’t pay royalties, because the truth is that they do. In Mexico, miners pay for each square meter of the concession, an exception among other top mining nations. So why does everyone say miners don’t pay? The reason is that in other jurisdictions, mining companies pay taxes on the profits generated in the mines. Hence larger operations pay a larger sum in taxes on their activities. Obviously mining companies are also investing a lot in research, development and exploration in order to make discoveries, and so there are lots of costs associated with their activities. That said, I believe that the companies need to find an equilibrium between fees and royalties to stimulate further economic activity. The mining law aims to benefit communities near mines and further strengthen the jurisdictional framework in mining. Why mandate this by law when companies already invest in communities and regard Mexico as a top mining jurisdiction? This is perhaps the most important issue we must consider—the president's instruction for Congress to reform the distribution of benefits to local communities where mining occurs. One major

reason for the fragile condition of some projects, is due to locals not receiving the benefits of having mines nearby. As a result, communities become opponents of mining activity, even if a project doesn't threaten their general wellbeing, ecological environment, or the traditions and values of the community—but simply because they aren’t seeing enough benefit. So there needs to be a change in the law to create more participation and a voice for those located near mines. The final issue is to establish jurisdictional certainty for mining activities and send positive signals to investors. The most disastrous action we could take is to grant concessions and titles only to rebuke them once discovering they lie in protected areas or indigenous zones. Our jurisdiction cannot operate "after the fact" because it sends the worst possible signal to overseas investors. There's needs to be clear definition so we know exactly how and where to develop mining projects—meaning no surprises once substantial investment has been made. Despite Mexico’s positive reputation as a mining jurisdiction there have been a few "after the fact" rulings, raising doubts in the system. I believe that mining in Mexico has significant potential that has yet to be fully exploited. If we better define the jurisdictional framework, while creating benefits for local communities, the sector can realize its truly enormous potential. Mexico's era of capital controls and import restrictions is long gone. What has been the impact of Mexico opening up its economy to foreign investment beyond just NAFTA? President Enrique Peña Nieto has made it clear that strengthening Mexico’s role as a responsible global player must first and foremost bring benefits to the nation's people. The country has strictly adhered to an open economic policy from the mid-1980s, because free trade encourages productivity while benefiting consumers and citizens alike. Today, Mexico has more FTAs than any other country—12 in total—granting preferential access to 44 countries who comprise 70% of world GDP and account for a market of a billion consumers. Without a doubt, Mexico’s economic liberalization would not have been successful without NAFTA. The agreement, dating from the early 1990s, was a milestone in our global integration. Mexico’s total trade with the rest of the world now tops $742 billion. In the last 19

T SX .V: S V L NY SE M K T: S V L C

Low Cost Silver & Gold Producer in Mexico Why Invest in SilverCrest? PEOPLE Management team has accumulated a century’s worth of international mining success PRODUCTION Santa Elena Mine (Mexico) high-grade gold & silver, open-pit heap leach mine FINANCIAL Strong balance sheet with growing free cash flow PRODUCTION GROWTH Expansion plan to double AgEq production by 2014 RESOURCE GROWTH La Joya 198 million oz AgEq resource & growing

Scan the QR codes for more info. Get the FREE mobile app: http:// gettag.mobi WEBSITE

MEDIA

PRESENTATIONS

years, Mexico’s exports have risen sevenfold, reaching $371 billion in 2012. At the opposite end of the spectrum, FDI is four times higher than in the pre-NAFTA era; between 1994-2012 Mexico, on average, received $18.5 billion in FDI each year. International trade grows more sophisticated each year, not for the types of goods and services that change hands, but rather due to new actors in the Asian economies who've also seen concurrent growth over the past 20 years.

501 – 570 Granville Street Vancouver, BC V6C 3P1 Tel: 604-694-1730 | Fax: 604-694-1761 Toll Free: 1-866-691-1730 info@silvercrestmines.com www.silvercrestmines.com

Mexico has been the belle of the international press yet economist Paul Krugman has said that he's yet to see the “economic miracle.” What are the shortcomings of the Mexican economy?

Being part of the global economy is only one aspect of growth; there are still many unresolved issues dating from economic liberalization. Research and development here only makes up 0.4% of GDP—far short of comparable investment in other countries. In the past, we Despite Mexico’s participation in the Trans Pacific Partnership, should have reformed the energy law, because we didn't know how you are also pursuing a separate Pacific Alliance with three to leverage our country’s massive hydrocarbon potential responsibly. other South American countries. Why look In education, our competitors also superseded south when Asia remains the powerhouse of us. It’s astonishing that Mexico was able to climb global growth? international competiveness rankings while our If we better define the There will be synergies and significant jurisdictional framework, private sector actors had their hands tied, unable to rely on the fundamentals considered necessary growth in trade between Mexico, Chile, Peru while creating benefits for a country’s competiveness. So where are we and Colombia if trade were liberalized. Yet there are also many non-commercial aspects for the local communities, currently? Since 1997 we’ve been trying to reach a level of political cooperation between all actors. It’s the sector can realize deriving from the Pacific Alliance such as free migration and political cooperation. For its truly great potential. only now, with the Pact for Mexico, that we have accomplished the task that has been unattainable Mexico, the Alliance sends a clear message to for the last two decades. And the Pact allows us the world that there are four countries in Latin America who are committed to free trade and open to investment to deliver the president’s concept of "democratizing productivity." under sustainable global standards. Without a doubt, the While some companies have taken advantage of the opportunities American continent is becoming more closely linked to emerging globalization provides, the vast majority are not globally connected. economies and we want to ensure that Latin America is present in By democratizing productivity, we want all actors in all regions to this growth. I believe this decade will be a new chapter for Latin come on board and stimulate the internal market by developing America due to FTAs like the Pacific Alliance. In the past, Latin global supply chains and emphasizing exports. So to respond to Dr. America was said to have been experiencing a “lost decade” but Krugman, Mexico is yet to become an economic miracle because the now I think we're at the start of a decade of success, and it's one foundations are still being laid. Fortunately, it’s a process that is now underway and we expect it to conclude successfully. where Mexico's in the spotlight. Mining Leaders

leader insight José Mártinez Gómez President AIMMGM

In July 2012, engineer José Mártinez Gómez was elected to a two-year term as the President of the AIMMGM (Mexican Association of Mining Engineers, Metallurgists, and Geologists). Mártinez attributes the difficulty miners face in recruiting skilled labor in Mexico to the sector’s negative image among the public. By the end of his term in 2014, he hopes to have improved these perceptions and keep Mexican students training in the earth sciences.

Alma Miner

We want to create an understanding of the mining industry where both the authorities and the public appreciate its benefits. Perceptions of the mining sector are turning young people away from entering the earth sciences, a phenomenon that could threaten the future of the industry. They need encouragement so that their technical abilities increase, keeping the industry in the hands of Mexicans. Four factors permit the development of a productive mining industry in any given country—two of these I would class as external and two as internal. Right now Mexico is blessed with strength in two external factors. First, we have the geological fortune to be a country wealthy in high-grade deposits, allowing ample opportunity for exploration. Second, the country benefits from high international metal prices. In terms of the two internal factors, Mexico has a clear, pro-investment mining policy, which in combination with the above factors, has made it the number-one exploration What use are large deposits, destination in Latin America. But it is the final factor, human capital, that has become a clear mining code, and high most important for the Mexican mining commodity prices if a country industry. What use are large deposits, a clear lacks the skilled engineers mining code and high commodity prices if needed to extract the metal a country lacks the skilled engineers needed from the ground? to extract metal from the ground? Mexico has been a mining country for many centuries and the country’s strong corps of engineers reflects this long tradition. We are not stuck in our ways: we have closely followed technological developments in Canada and Australia. However, our current mining talent hails from an older generation. We need young mining engineers and geologists to oversee the industry for the coming years. Several countries around the world have developed initiatives to rapidly train mining engineers. But with commodities cycles lasting around 10 years on average, many of these engineers will finish their training just as

the cycle comes to an end. What we need is a more long-term view. In Mexico, the crux of the problem is that negative perceptions of the mining industry discourage many students from studying earth sciences. The stereotype of mines as dangerous, lingers in the popular imagination; so parents are reluctant to encourage their children to go into the field. However, the statistics show that this belief is unfounded. My company has 800 employees and we have operated for more than 15 years, working 365 days a year, without a single fatal injury. Nevertheless—as with plane crashes—the few accidents that do occur are sensationalized in the media. Correcting these misconceptions is one of AIMMGM’s main tasks. By changing these negative perceptions of mining we hope we can encourage more students to study earth sciences.

AIMMGM also focuses on improving the quality of training available. In mining, what you know is what you’ve done; yet engineering courses have often focused on theory rather than practical experience. Being able to recite books from memory is of little use if a student has never entered an underground mine. The problem is worsened by the fact that many professors have never worked in the field. AIMMGM aims to shift this balance. We want to work with educational authorities to allow schools to hire older mine engineers who may lack advanced diplomas but have a wealth of practical experience to pass on to graduates. Our industry does a great deal of good for Mexico; however, we must do more in spreading the positive statistics of social and environmental benefits that we contribute to the country. My goal as president of the AIMMGM is to bring about changes in these perceptions, and I assure you we are already working on it.

q&a

Champions

of commerce

Rosalind Wilson Former President of Chamber & Current Head of Mining Task Force Canadian Chamber of Commerce in Mexico

Canada has become Mexico’s number-one investor in mining and fourth in the overall economy. Expediting this growth is the Canadian Chamber of Commerce, for which Rosalind Wilson served two terms as president. During her tenure, CanCham’s mining members increased from 5 to 58. Today, she heads CanCham’s Mining Task Force and works with both governments to support Canadian explorers and producers in Mexico. How does the Chamber’s Mining Task Force help miners do business in Mexico? The Task Force exists because of very specific industry needs. We don’t see manufacturing or service companies having to defend their practices in the same way mining companies have to. We help people understand that Canadian mining investment is responsible, sustainable and good for Mexico. We work with federal, state and in some cases municipal governments, to spread the word. We do a great deal of state outreach particularly in mining states like Sonora, Durango and Chihuahua. Mining companies are doing great community work, but the message often doesn’t get communicated as well as it could be. That’s not surprising, as our companies are too busy doing what they should be—operating in a safe, environmentally friendly, sustainable and efficient manner. What is the largest issue for Canadian mining companies operating in Mexico? We emphasize the importance of rule of law. While many of our projects are problem-free, some issues stemming from dysfunctions in the rule of law have allowed individual interests to block projects. In practice, anyone from a municipal or state government to an international NGO, can obstruct projects. That is simply not right. If a community is asking for investment and miners bring that investment sustainably and responsibly, it is counterproductive to allow parties with no stake to detain development. It’s imperative for investors, as well as for regional development, that these issues are addressed. We abide by clear rules and we need government support to make sure they are enforced. Having said that, we believe President Peña Nieto and his team are aware of this issue, which is encouraging from a Canadian investment standpoint. In the 20 years since NAFTA, trade between Canada and Mexico has grown over 800%. How do you respond to the criticism that Mexico received more problems than benefits from NAFTA? The key issues such as exploitation and pollution that everyone was criticizing 20 years ago, have pretty much disappeared. The trade relationship between Mexico and Canada now favors

Mexico two-to-one because of all the manufacturing and exports. Job creation has been huge. Mexico City is far less polluted today than it was when NAFTA was signed. Industry has modernized and shifted to other parts of the country, creating regional and sustainable development. Nowadays, oncesleepy towns like Querétaro are buzzing with commerce and industry. People may complain about mining investment, but they certainly don’t complain about manufacturing investment. NAFTA really has been a good story for Mexico; ironically it’s us Canadians who are lamenting the loss of productivity, and that’s certainly not because of cheap labour and poor environmental standards in Mexico, but because Mexico has raised the bar. Manufacturing companies have located here because Mexican labor is highly skilled and efficient. In fact, it’s not uncommon in manufacturing, particularly for companies in the automotive sector, to see their Mexican operations winning best worldwide productivity awards. Mexico has now joined the Trans-Pacific Partnership (TPP) negotiations. How will this reshape trade in the NAFTA bloc? When NAFTA first came into effect, offshoring to China and Asia was a new phenomenon. Today China’s place in the world economy has made the TPP a buzzword. If anything, the TPP will force NAFTA to be more efficient and rethink areas that could perhaps be improved. However, our North American trading bloc shares some unique characteristics that cannot apply to other trade deals. We share the same landmass and our borders connect by both road and rail. This brings a special set of opportunities and challenges that cannot be ignored. As labor costs increase in China and other Asian countries, nearshoring will likely increase and NAFTA will continue to drive North American competiveness. It’s interesting to note that while Enrique Peña Nieto's administration is positioning Mexico’s role in the global economy via the TPP, we’re pleased to observe that many of the government’s actions appear to reveal its priorities as: Mexico first, then North America, then the rest of the world. While the TPP is an important step, it shouldn’t dictate what we do in our North American trading bloc. Mining Leaders

analysis By Luis Carlos Ugalde General Manager Integralia Consulting

(im)pacto por mexico

Once the dust finally cleared over the outcome of Mexico’s 2012 general election, Enrique Peña Nieto emerged the victor. Immediately, the president began a series of reforms under the banner of his Pacto por Mexico, aimed at overhauling the structural issues holding back growth. After almost two decades of political and economic stagnation, Mexico seems to be back on track. Analysts around the world are calling the Mexican economy the Aztec Tiger, and many expect GDP to reach Brazilian proportions in the next decades. In 1994, the United States and Mexico made international headlines with the enactment of the North American Free Trade Agreement (NAFTA). Soon after, Mexico became the United States’ second-largest trading partner after Canada. Mexico did not have long to enjoy its position though, and found itself supplanted by China in the early 2000s. The rise of the BRICS (Brazil, Russia, India, China and South Africa) as attractive economies for investment seemed to further marginalize Mexico on the international scene. A lack of structural economic change as a catalyst for productivity lay

behind Mexico´s lack of appeal to international markets. Additionally, President Felipe Calderon’s (20062012) declaration of war on drug cartels was followed by an eruption of violence; by 2010, some parts of Mexico were among the world’s most violent, with Juárez near the Texas border earning the dubious distinction as the most violent city in the world—more dangerous even than some regions in Iraq and Afghanistan. News from Mexico became synonymous with mass killings and beheadings. If NAFTA and other structural reforms made Mexico attractive to foreign investors in the 1990s, lack of change thereafter made it irrelevant. During 1993, when NAFTA was under negotiation, 87% of The New York Times’ Mexico coverage was positive, focusing on

political, economic and financial issues. In 2010, the opposite was true: 84% of the news coming from the same newspaper was highly negative in tone, dealing mainly with violence, drug trafficking and illegal migration. The new administration of President Enrique Peña Nieto (2012-2018) offers a window of opportunity to overhaul Mexico´s economy and politics. After 15 years of legislative gridlock, progress is finally being made. Under a political bargaining scheme known as the “Pact for Mexico,” Congress passed two crucial and transformative reforms on education and telecommunications in the spring. Mexico comes in at last place in the OECD’s education rankings. The educational reform is necessary to break a dysfunctional system run by the unions, and improve the quality

MEXICO´S POLITICAL OUTLOOK Telecommunications and energy reforms will have a considerable impact on the economy, making this goal seem closer.

of education in the long-term, laying the groundwork for a competitive economy in the future. The second reform will most notably break up Carlos Slim’s telecommunications empire and introduce more competition in television services, while also widening internet access. In late 2012, a new labor code was approved to stimulate productivity, while new budgeting and accountability practices were introduced to make government accounts more transparent— especially at local level. In coming months, reforms in the energy, banking and financial service sectors are also expected. These reforms derive from demands by opposition parties as a precondition to continued cooperation with government under the Pact for Mexico agreement. After six months at the helm, Enrique Peña Nieto has shaken the status quo by reforming controversial and delicate areas that have been “off limits” for decades. Despite the barrage of reforms, it’s difficult to say just how long such political cooperation will last. But there should be sufficient time to lay foundations for long-term economic growth and a new wave of investment and productivity. It’s

likely that the Pact for Mexico will end at some point in the fall. If, as expected, the energy reform bill and the fiscal reform reach the floor, the leftist Party of the Democratic Revolution (PRD) will break with the administration, being at odds with private investment in energy and a universally applicable valueadded tax—both central tenets of reforms needed to attract investment and finance government spending. From the moment the divorce is announced, it will be up to the rightof-center National Action Party (PAN) to support these reforms and make change possible. Regional elections will also test the unity of the Pact for Mexico later in 2013. However, two developments need be taken into account. First, structural changes need time to take hold and have an effect on markets. For instance, changes made to the education system now, will only produce results in two decades, after the current generation of kindergarten-goers has graduated through the school system. Changes made in telecommunications or energy, however, will have a more immediate impact on investment and productivity. One of Peña-Nieto’s main campaign promises was to increase GDP growth to 6% annually by the end of his six year term.

The second development that analysts must consider are the social problems that hold back the economy. While Mexico can implement economic reforms to stimulate growth, corruption and violence act as taxes on investment. Corruption has worsened in Mexico over the last decade, with no sign of obvious improvement on the horizon. As for violence, although homicides have declined over the past few months, numbers continue to be very high and no evidence so far exists that the decline will persist. Even though the administration argues that the number of homicides related to organized crime has decreased approximately 17%, it remains a very high total by global standards: with more than 4,000 murders between December of 2012 and March of this year. Corruption and violence are problems that Mexico will have to fight for some years to come. However, forces for change and growth, in energy and telecommunications for example, create a current to overcome those problems. At the same time, there is growing demand for more accountability at all levels, from federal to municipal governments. Social networks are a new force in bringing government officials into the public eye. Combined, these forces will help to undermine corruption and build a rule of law system, the best foundations for sustainable economic growth.

Integralia Consultores is Mexico City based research and consulting firm specialized in legislative affairs, political analysis and governance issues. The firm works with private sector clients in navigating and managing politics in Mexico. www.integralia.com.mx

Mining Leaders

leader insight

super mario's mines Following Ildefonso Guajardo's appointment as Secretary of Economy, he subsequently chose Mario Cantú as the Coordinator General of Mines. Cantú—a UPenn-educated economist—has 24 years of experience in the public sector, mostly within the Secretary of Finance and Public Credit. Critics say that he lacks mining experience, but according to sector leaders interviewed by Mining Leaders, he is visiting mines and rapidly learning the ropes. Cantú lays out his priorities for the mining industry and describes the sector’s role in the National Development Plan.

n 2013 we expect over $8 billion in foreign and domestic mining investment in Mexico. Since the amendment to the mining law in 1992, the country has been a magnet for foreign investment. In the last five years, mining investment has more than tripled from $2.156 billion in 2007 to $7.647 billion in 2012. Clearly Mexico is an attractive destination for mining due to NAFTA, our skilled workers and reliable infrastructure. Though issues such as security tarnish Mexico’s reputation, miners are not dissuaded and they continue to come from around the world to explore and operate projects. The new government’s 2013-2018 National

Development Plan (PND) aims to bring economic growth to 6% by the end of President Peña Nieto’s six year term. Mexico has over half a millennium of mining history, making the industry crucial to the nation. Last year, mining generated $22.683 billion in export revenues, making it the fourth largest source of foreign currency after the automobile, electronics and petroleum industries. The combined metallic and non-metallic mining sectors contributed to 4.9% of the country’s GDP. We’re tenth in the world in gold and copper production, but number one in silver. This year the sector will employ 334,148 people directly and over 1.6 million indirectly. In

the future, we are confident that the sector can continue to grow and bring even larger benefits to the Mexican pueblo and foreign investors. With the publication of the 2013-2018 PND, the mining sector will continue to remain competitive and serve as a cornerstone of the economy. The new focus for the industry is creating benefits for the communities where mining takes place. Strategy 4.8.2 of the PND states that the aim is to “promote higher levels of investment and competitiveness in the mining sector.” The strategy is divided into three action points. First is encouraging investment in the mining industry;

second is increasing financing for the entire value chain of the sector; while the third is guiding small and medium-sized miners in exploration, production and the commercialization of mines. By promoting mining globally and continuing to provide investor certainty, we will maintain the dynamism and competitiveness of the sector. As the Coordinator General of Mines, I have laid out three priority areas that, in tandem with the PND, will guide mining policy. The first priority is to bring benefits— including infrastructure, employment, and the development of the local service provider industry—to communities and municipalities hosting mining operations. The second priority will be accomplished by introducing a new tax on mining profits and by continuing the development of more mining clusters like those in Zacatecas and Chihuahua. Our final priority is enhancing safety regulations in the coalmines, traditionally an informal branch of the industry, via heightened monitoring of working conditions and ensuring strict compliance with federal labor laws.

Central to the growth of the mining industry has been the strong regulatory framework that built an environment of transparency and certainty for investors. Today there are over 200 TSX-listed companies with projects in Mexico. But the sector is changing and the laws governing the mining industry must change with it. Currently, mining has preferential status over any other use of land. And while concessions are granted for a period of 50 years, rights to the surface are not included. By modernizing the law have considered the need to expedite processes and improve agility. We can make plenty of improvements and reduce land speculation by requiring concession holders to develop concessions or otherwise face fines. The mining sector still faces many challenges, but we're confident that over Peña Nieto’s six-year term we'll see between $25 and $26 billion in investment. Currently, world metals’ prices are well below their 2011 highs. This is causing a lot of anxiety in the sector. Mexico is fortunate to have a diverse geological base and a more

competitive position versus similar countries, like Chile or Peru, due to modern infrastructure and connectivity with the rest of North America. While some countries such as Peru have long relationships with Asia, Mexico has traditionally looked to the north for its trading partners. Mexico sees a lot of investment from Asia in other industries, mainly automotive, but our administration is trying to attract more Asian investors in the minerals sphere. Though there may be concerns over the new fiscal regime, and security, I am confident that Mexico will continue to rank as one of the best mining jurisdictions in the world. Explorers and producers alike are familiar with Mexico. They understand that this country has boundless exploration potential, as well as strong investor protection and transparency in the mining industry. From my position as the Coordinator General of Mining, I would like to reassure the foreign investor community that Mexico will not only remain a strong mining jurisidiction, but will also continue to improve. Mining Leaders

q&a

ENTER THE

Humberto Gutiérrez-Olvera President Camimex

CHAMBER

Humberto Gutiérrez-Olvera, President of the Mexican Chamber of Mines (Camimex), is confident about the federal government’s new team and believes they have the tools to guarantee the sector's success. GutiérrezOlvera explains how mining is going through a cyclical phase that must be leveraged to create jobs and develop communities in mining regions. He is focused on promoting mining’s positive contribution to society. Some would say that Camimex prioritizes the interests of Mexican miners. How has the chamber helped foreign companies operating in Mexico?

Camimex spearheaded a study on the impact of royalties in other countries. Which factors need to be taken into account when applying a royalty to Mexico?

Camimex is the oldest industrial chamber in the country. Since 1906 we´ve worked on building a strong mining sector, which has long been a driver of Mexico’s economic development. Nowadays, we include overseas multinationals among our ranks and many of their representatives have a seat in our executive committee. A third of companies on the board of directors are Canadian, including Goldcorp, First Majestic Silver, Pan American Silver, Primero Mining and Agnico Eagle, among others: we all have an equal say and make decisions together. We also have a strong relationship with CanCham on various issues.

Many parties don’t acknowledge that miners already pay royalties in Mexico, for example companies pay a fee on each hectare they own. In 2012, the government received MXN$3.125 billion pesos ($245 million) in royalty fees. To claim that the mining sector doesn’t pay royalties is completely incorrect, since we estimate that these kind of payments represent as much as 4% percent of a company’s accountable profits, depending on each firm´s financial situation. There are also other kinds of royalties that must be addressed. For example, if working in a mining reserve zone assigned and reserved from the Mexican Geological Service (SGM), firms pay a fee in the range of 1%-3%. We truly believe that prior to discussing the implementation of any additional tax there should be an in-depth review of the contributions already made by the sector, the existing revenues system, and most importantly our investments in the rural communities and country. Given the uncertainty of the current markets, we need to consider the impact of an additional charge if metals prices were to drop further.

How is the chamber organized? We have active members (producers) and co-members (suppliers, explorers and other service-oriented companies). The active members are part of the board and executive committee. Medium-sized companies have an active role in the chamber; but unfortunately, small companies only have a minimal presence. Even so, the Chamber provides information to unaffiliated small miners and we invite them to attend the workshops, conferences and seminars that we regularly organize. Your team has predicted $8 billion of investment in Mexico's mining sector this year. Do you think this is an accurate estimate? We hit $8 billion in 2012. Judging from the information we’ve been given by our members, we will go slightly beyond $8 billion in 2013. As long as unforeseen obstacles don’t emerge, investment will continue growing. We have 15 projects that will start operating from 2013 to 2015. There are 35 projects in advanced exploration, of which a large percentage will enter production within three years. This will ensure growth of the mining sector in the near and long-term future.

It should also be noted that the Mexican mining sector doesn’t receive any fiscal stimulus. The governments of Chile, Peru and almost every other country, have funding programs in place to encourage mining companies. Furthermore, you can’t compare the competitiveness of a country based solely on respective royalty regimes: all the other relevant aspects of a country need to be considered. In Mexico’s case, miners pay a tax on profits via the workers profit sharing tool (PTU), and through the royalty on mining concessions. On top of these two costs, energy, provided by the governmentcontrolled Federal Electricity Commission (CFE), is very expensive in Mexico, much more so than in other territories. While Chile implemented royalties without any apparent adverse reaction, the country only has a 20% percent tax on profits, compared to 30% in Mexico. All of these factors must

billioN

investment in mexican mining sector in 2013 be taken into account when determining a country’s competitiveness, and before implementing a royalty on the mining sector. What other initiatives are Camimex’s commitees currently examining? Facilitating the mining sector’s growth is essential to ensure Mexico continues its economic development. The sector directly employs 329,000 people, while two million families rely on mining in some form. Also, mining salaries are 37% higher than the national average. Mexico needs to remain competitive to ensure continued support for these families. It is also necessary to share and communicate the positive contributions that mining makes to the country—it is a very misunderstood sector. Human resources still need to be developed in Mexico. To help in this area, mining companies and the chamber are offering 3,500 fellowships for students and professors. Human resources still need to be further developed in Mexico. How else will you continue to boost human resources in mining? We will continue to give scholarships to both professors and students alike. But our goal is to spearhead mining promotion—and for this we need to further our human resources. We achieve this by helping people develop an interest in mining and through our joint work with different universities. It's important for the companies to communicate the availability of employment. Women need to be made aware that they can work in mining too. There are very capable women driving ultra-class trucks with 400 tons of ore. Women used to be considered unlucky in mining; it was said the mine would get jealous of women. Now women are working in droves at the mines and its increasing day by day. Mining Leaders

q&a

Francisco Nicolás González Díaz CEO ProMéxico

Mex Appeal

ProMéxico CEO Francisco González believes Mexico’s steady economic forecast, transparent regulatory environment and untapped resource wealth make it the most appealing destination for mining investment in Latin America. Together with Mexico’s preexisting market conditions, González predicts the mining sector can contribute significantly to President Enrique Peña Nieto’s aim to double FDI in Mexico over the next six years. What makes Mexico so appealing to miners and investors? Mexico's mining sector offers investors three distinct advantages over other Latin American destinations: first, the promise of steady growth over the coming years; second, an attractive mining tax scheme that has made it the world's largest silver producer; and third, up to five hundred prospective sites with potential for mining. Mexico is among the top 10 producers of 17 minerals, including gold, copper, and zinc. Moreover, there are vast swathes of the country with untapped mineral potential. It isn’t surprising that Mexico is the fourth most attractive destination for investment in prospecting, just below Canada, Australia and the US. What assistance does ProMéxico offer to mining companies wishing to establish a presence in Mexico? ProMéxico provides both foreign and domestic mining companies with relevant details regarding the main market opportunities in Mexico, and also key information about the company's target market. We also advise companies during the course of investment processes. This includes matters related to location, business practices and opportunities, as well as queries regarding government procedures and other project-specific assistance. ProMéxico links companies with private, public and academic institutions, so they can foster local strategic networks. For example, ProMéxico has a close relationship with the Coordinator General of Mines, the agency responsible for applying the country’s mining regulatory framework. We can also connect companies with the Mining Promotion Directorate, which promotes competitiveness and investment, and with the Mining Development Trust (FIFOMI), which encourages the development of local mining, job creation and investment by delivering training along with technical and financial support. What impact will the new mining law have on the sector? By signing the Pact for Mexico, the country’s main political parties have agreed to work together to transform the mining sector into a more efficient, productive, and responsible

industry. The initiative aims to make the mining sector more socially responsible by expanding the benefits generated by the industry to inhabitants of mining regions. Crucially, the initiative will review the federal royalty payments linked to production. The challenge is to make sure that the royalties benefit the correct communities. The initiative also tightens environmental regulations, emphasizing greater sustainability. Our present administration also wants to streamline the entire regulatory framework to facilitate greater investment and competitiveness. Even though Mexico's mining sector primarily consists of domestic companies, our country’s regulatory environment is attracting more and more foreign miners each year. And I’m certain that our resource wealth, and the reforms that are on their way, will encourage even greater investment in our country. What are your goals for 2013 and beyond? Part of ProMéxico’s role is to attract FDI, and with President Enrique Peña Nieto’s goal of reaching $25 billion by the end of 2013, it’s something we are pursuing in earnest. Since 2008, Mexico has approved 16 mining projects with an aggregate value of $3.3 billion, representing around 9,000 new jobs. Principal funding for these projects came from the US, Canada and China. In 2012, investment in Mexico’s mining sector reached approximately $7.6 billion; over the past five years, this number topped $25 billion. The three largest Mexican mining companies in the country— Grupo México, Frisco, and Industrias Peñoles —together announced that they will invest $6.7 billion in 2013. Mexico’s future looks bright. The New York Times recently stated that Mexico will become a dominant economic power during the 21st century. And the NYT is not alone in this assessment: Goldman Sachs, Nomura, HSBC, Accenture, and PricewaterhouseCoopers, among others, predict that Mexico will be between the fifth- and eighth-largest economy in the world over the next decades. I strongly believe that we are close to achieving this goal.

Mining Leaders

article

Tariff Battlers

Sharing a border with the world’s biggest consumer of manufactured goods, Mexico has long sought to carve out a niche in export markets by advocating trade liberalization. In 1994, the North American Free Trade Agreement (NAFTA) removed most tariffs between Mexico, the United States and Canada. As NAFTA approaches its 20th anniversary, its impact has proved more significant than many anticipated: trade between Mexico and the US grew at an astonishing average annual rate of 10%, with bilateral trade reaching $494 billion in 2012. The mining sector has benefited greatly from the post-NAFTA FDI bonanza; Mexico now accounts for 28% of the world’s silver production and 2% of global copper output, and ranks 10th in the world for gold production. Analysts have also credited NAFTA

with the relentless growth in Mexico’s manufacturing sector, which has swiftly become a rival to China’s dominance in US-destined exports. Partly as a result of an oil price that has tripled since 2000, it's now cheaper to manufacture goods intended for US and Canadian markets in Mexico, rather than China.

Mexico’s free trade love hasn’t stopped with its neighbors north of the border, though. In 2011, together with Peru, Chile and Colombia, Mexico joined the Pacific Alliance. As a trade bloc, the Alliance forms the eighth-largest economy in the world, with a 2012 GDP growth rate of 5%, and an inflation rate of 3.2%. To put this into perspective, for the same period regional GDP grew at only a modest 2.8%, while regional inflation stood at 6%. Although in its infancy, the Pacific Alliance has already Pacific Alliance Stats

Source: Annual Statistics of Latin America & Caribbean, Cepal

laid the groundwork to eliminate all trade barriers between the four countries. Even so, the Alliance is not intended to function simply as a standard FTA, but rather as a pact that aims to achieve comprehensive economic integration at multiple levels. The founding nations are open to accepting new members, and there's no shortage of prospective applicants either. Australia, Canada and Japan, to name just a few, are all observing the ongoing Alliance negotiations with an interest in joining the trade bloc. The trade bloc also has long-term ambitions to strengthen economic ties with Asia. In October 2012, Mexico ticked another item off its free-trade to-do list by joining the Trans-Pacific Partnership (TPP) negotiations. The Mexican government hopes that attaching itself to the TPP will deepen the synergies already present in its relationship with the US and, in the case of Asia, “[leverage] Mexico’s role as a relevant player in global supply chains.” The TPP also presents an opportunity for Mexico to diversify its exports. Over the last six years the country’s exports to Asia have increased by over 20%, and the TPP could prove key in helping Mexico consolidate its comparative advantage in export markets. Of course, given the scope and ambition of the TPP—11 countries are currently engaged in talks—the probability of a concrete agreement being reached in the near future is somewhat remote.

leader insight Radek Divis Trade Commissioner & Said Hawayek Mining and Resources Specialist Austrade

Australia’s Trade Commissioner for Mexico, Radek Divis believes it is only a matter of time before more Australian miners are lured to Latin America by its high prospectivity and friendly investment climate. Divis now functions as the bridge between Australian mining companies and the opportunities in Mexico’s mining sector and is positive about the potential for new opportunities under the Trans-Pacific Partnership currently under negotiation.

Plying the Trade Governments on both sides of the Pacific have made efforts in recent years to stimulate interest in Australia–Latin American trade relations. We have found that there are close synergies between the two, both in regards to investment and the MTS sector. Chile has been the launchpad for Australian industry in South America, due to its geographic proximity and sound legal, financial and regulatory environment. Crucial to the relationship, however, is that Chile is the only Latin American country to have an FTA with Australia. This makes it a highly appealing destination for Australian MTS firms, as it allows them to compete on equal terms with international competitors. Now, Australian mining companies are also more closely examining Peru, but it increasingly seems Mexico will be the next industry focus. Due to the strong, proactive approach by successive governments, Mexico’s mining sector is highly favorable for FDI. Unfortunately, though, Australian companies have not always been aware of the opportunities. Part of our job is to promote the message to Australian companies that Mexican mining is open for business. The Mexico’s mining sector is current reality for Australia is that Mexico highly favorable for FDI due is still a country of potential, rather than to the strong and proactive of realization. While Australian FDI in the mining sector ranks fourth or fifth, this only approach by successive equates to a modest 4% of the total. On the export side, we believe there's potential to expand trade ties, despite the lack of an FTA, especially as awareness of opportunities grows. Mexico’s miners view Australian technology as cutting-edge, and are willing to acquire more, but have expressed a clear preference for foreign MTS firms to set up in-country. If a mining company begins using certain equipment and it breaks down or requires servicing, the technology provider’s local presence is crucial. Many companies have still found opportunity here, for example—Orica, Maptek, Gekko, Optalert and IntierraRMG. Education and training services are not subject to tariffs, and Australian MTS firms have really excelled in this area. Mexico offers broad

scope for Australian educational providers and consultants to tailor training programs for Mexican companies. Now that Mexico has joined the Trans-Pacific Partnership (TPP) negotiations, a comprehensive FTA and subsequent tariff reduction seem increasingly possible in the coming years, and would greatly enhance opportunities for Australian MTS firms. The Australian government considers the TPP a viable pathway for realising the vision of a free trade area of the Asia-Pacific, with the potential to increase trade and investment across the region.

In relation to investment, we are now collaborating with Mexican authorities in laying the groundwork for closer ties. We have a very healthy relationship with the Mexican government, and have been kept informed of proposed changes to national mining Mexican governments. regulations that could potentially impact on foreign investments. For the last two years we have supported a conference in Australia— Latin America Down Under—which provides an opportunity for Latin American countries to highlight investment opportunities in their mining sectors. This year we worked very closely with the Mexican authorities, whose delegation was led by Mario Cantú, Mexico’s General Coordinator of Mining, to craft a message that is appealing to Australian companies, especially juniors. Overall, we’re trying to foster a positive, symbiotic, bilateral relationship. Australia’s collaboration with Mexico in mining matters is now extending into areas beyond pure trade and investment. Last October we organized a mining sustainability workshop for representatives from five Central American countries and the SGM (Mexican Geological Survey). Experts from Australian universities shared Australian approaches to mining sustainability, water management, relations with indigenous communities, and the regulatory framework. And in March this year, my office supported a workshop highlighting Australian vocational educational approaches to mining, and how they might find relevance in the Mexican context. Mining Leaders

q&a

Yes We Hector de los Santos & Vicente Herrera Partners Canmex Mining

Canmex

Canmex partners Hector de los Santos and Vicente Herrera grew up together in Mexico; decades later they bumped into each other and discovered that each ran his own consultancy. In 2012, they founded Canmex Mining to help link Canadian miners in Mexico with its government. Today, Canmex concentrates on government, public and industry relations and also advises on security, environment, social licensing and land access. In what areas do Canadian firms need support when operating in Mexico? Speaking Spanish is in itself not enough to get business done in Mexico—strong government relations are key for mining companies. Canmex liaises between Canadian companies and Mexico primarily for government relations, but we can consult on virtually any issue in the sector. Through a series of strategic alliances, we can advise on security, environmental and community issues, all of which can pose problems for foreign mining firms. Without the right support and experience, a problem that could take six months to resolve can end up lasting two years. A firm might eventually accomplish its goals on its own, but it saves time and money by working with an experienced consultant.

reconsider the measure. This is the reason we have suggested hiring a lobbying firm to represent the industry. We either let it pass and then read about it in the newspapers or we have someone fighting for the benefits of miners. How can miners avoid project delays due to community relations issues? In general they must carry out thorough due diligence to avoid any issues. As implausible as it may seem, many companies don’t do this and then find themselves in situations where they need to react because they didn’t plan ahead. Our consulting firm helps with such planning in the environmental and security areas so that miners have a clear picture of where they’re going before they even put a foot down.

The global mining industry faces an How have you tried to strengthen ties image problem. How does Canmex "As incredible as it may between the state and the private sector? plan to promote the sector to the seem, many companies One of our first actions was to host an Mexican public? event in Mexico City for mining CEOs to don’t do a thorough due dilmeet with key members of government. igence and then find them- It’s true that many mining companies selves in situations where have made mistakes—but that they Unfortunately, president-elect Peña Nieto was unavailable so instead we organized they need to react because can do much good. Probably 95% of companies do things correctly and bring an intimate event between 25 CEOs and they didn’t plan ahead" great improvements to towns. But how Ildefonso Guajardo Villarreal, the current do you get the word out to society? Some Secretary of Economy, who listened to the CEOs' ideas and concerns. Guajardo showed just how mining companies already manage media campaigns at open and supportive the administration is of the mining the local municipal level, but we see the need to bring industry. We are now planning similar events with other key broader attention to the benefits of mining with a national media campaign to educate the country about government officials. mining. We have contact with large media-relations What were the main concerns raised during this event? companies and are forming some strategic alliances Many expressed worries about a possible change in the with these firms. For this campaign we would like to mining law—a hot topic within the mining industry because partner with both Canadian firms and Mexican ones of the uncertainty over what the revisions will encompass. The such as Grupo México and Fresnillo. We have suggested government is evaluating the possibility of a royalty but knows creating different media to show in schools, before films it must take care or it will risk repeating the situation in Peru, and during sports games. Canadians are exposed to the where 20% of investment evaporated after the announcement benefits of the extractive industries from a young age; of a windfall tax, forcing the Peruvian government to we want to replicate this in Mexico.

Mining Leaders

GOLD

lead article

The MIDAS

TOUCH T

Photo: Frisco

he story of Mexico is the story of gold. Long before La Conquista in 1521, the indigenous groups of Mexico were extracting and processing gold for ceremonial purposes. Conquistadors wrote the next chapter as they moved from their beachhead in Veracruz, looking for the metal to finance a bankrupt kingdom in Iberia. Major Mexican cities, such as Chihuahua, Durango and Hermosillo, can trace their foundation back to Spanish gold mining settlements. Others, including Mexico City, were warehousing centers for mineral exports. And even after centuries of mining, reserves remain substantial. Guachichiles, the indigenous group, explored San Luis Potosí as early as the 15th century, but the state continues to be a lucrative source for modern-day miners. Twenty kilometers northeast of San Luis Potosi, the El Cerro de San Pedro mine operated by Canada’s New Gold, boasts gold reserves of 1.4Moz on top of silver reserves of 52Moz. Territories across Mexico remain relatively unexplored due to two decades of stagnation in the 1970s and 1980s, following a process of “mexicanization” requiring mines to be majority-owned by Mexicans. But the doors opened to modern exploration in 1992, when President Carlos Salinas de Gortari changed the law to allow foreign companies to acquire 100% stakes in mining firms operating within the country. Mining Leaders

lead article

3.4

Million oZ of gold produced in 2012

Fresnillo's La Herrudura mine typifies the large-scale open-pit operations found in Sonora state

In fact, Mexico’s mining legislation is a key factor behind the past decade´s exploration boom. The 1992 mining law created one of the most competitive minerals frameworks in the world, and in combination with proximity (both geographical and political) to Canada, the sector grew rapidly. In Mexico, mining is the fourth largest contributor to export revenue, after automobiles, hydrocarbons and electronics. Gold accounts for 25% of Mexico’s mining income, according to industry reports. The sector is also a major magnet for FDI with Canadian firms leading the charge. Horacio Bruna, head of Goldcorp’s Mexican operations, told Mining Leaders that the country’s industry is one of the world’s most technologicallydeveloped, even outpacing those of the United States and Canada, both mining giants with considerably wealthier economies. One positive effect of this advanced technology is Mexico’s safety record, which totaled 317 fatalities versus 547 in the US. Mexico’s gold production reached approximately 3.4Moz in 2012, up 118% in five years; in 2007, output was approximately 1.5Moz. The country’s top producers are Goldcorp (790,800 ounces), Fresnillo (473,340 ounces) and Agnico Eagle (234,837 ounces). Producers in Mexico have also proved remarkably successful in ramping up production, with extraction rates hitting more than eight times the levels achieved in the middle of the 1970s, at districts including San Martin, Charcas, Santa Barbara and Fresnillo. The largest mine in the country,

Goldcorp’s open-pit Peñasquito—near Mazapil in Zacatecas—represents a new generation of megaproject, more akin to those in Peru or Chile, yet along with Buenavista del Cobre, firmly establishes Mexico as a top-tier mining district. The mine is Goldcorp’s largest by revenue, however output has fallen due to a water shortage during summer 2012. While Zacatecas is better known for its large silver deposits mined since colonial times, Sonora has been Mexico’s flagship state for gold production, generating 1.6Moz in 2012, almost one-third of national output. And it's the Sonora megashear—a northwest trending belt— that hosts the state's auriferous wealth. The geology is frequently referred to as Carlintype i.e. sediment-hosted disseminated

gold, where grades are low enough to be considered "invisible", requiring the scale of a large open-pit operation. As a result, many major projects in Sonora are mined this way, including Fresnillo’s La Herradura and Soledad-Dipolos mines, along with Timmins Gold’s San Francisco and Argonaut Gold’s El Chanate. Mulatos, operated by Canada’s Alamos Gold, hosts proven and probable reserves of 2.37Moz; its 2013 production guidance is between 180,000 ounces and 200,000 ounces. Yamana Gold, another Canadian outfit, opened its Mercedes mine in late 2011 and expects between 130,000-140,000 ounces in 2013, with a predicted increase to around 150,000 ounces in 2014. Other new Sonoran gold mines include Fresnillo’s Noche Buena and Argonaut Gold’s La Colorada. Many observers will also keep track as Agnico Eagle advances its La India project over the course of the year. The mine is expected to see commercial production in the first quarter of 2014, with annual production totaling 70,000 ounces. Mexican Gold Production (kg)

120,000

100,000

96,650 84,118

80,000

72,596

60,000 50,365 35,899

40,000

20,000

20,277

21,818

2003

2004

51,393

39,355 29,906

26,782

2005

2006

2007

2008

2009

2010

2011

2012

2013 Q1

Source: INEGI

While Sonora may be the prime destination for investment dollars, Mexico as a whole has seen over $25 billion in investment between 2006–2012, so gold mines should see higher output and longevity. Despite the challenges faced by the global mining market and particularly juniors, over $8 billion of mining investment is expected in 2013, with $3.6 billion from the three Mexican majors, of which Grupo Frisco, has the biggest interest in gold and is expected to invest $600m to $700m as part of a multiyear expansion plan launched in 2012. Several of the challenges faced by gold miners in Mexico are common to the global industry. According to a 2012 report by PwC, out of 99 mining strikes worldwide between 2009 and 2012, 70% were triggered by wage demands, with the gold segment most affected. In Mexico, labor disputes and community resistance are not as problematic as in jurisdictions such as Peru; but Minera Frisco nonetheless saw stoppages at its mines beginning on May 15, due to demands for higher wages. By July 4, the company had resumed operations at two of its mines after renegotiating 13% increases for wages following union demands. With a long tradition of mining disputes dating back to the 1906 strike in Cananea, 2013 is set to be the year when government directly involves itself in redistributing the wealth generated from mining profits. Having been approved by the House of Representatives, the new mining law heads to the Senate in September. Rather than a fee pegged to the price of gold, the new bill proposes a flat tax rate. Naturally enough, given the recent dip in gold prices, this concerns investors. After a period of strength, gold prices dropped by 35% from October 2012 to June 2013, with a 25% fall in the second quarter of 2013 alone. A number of factors have contributed, including a signal from the US Federal Reserve that it would taper down quantitative easing, substantial gold sales by crisis-stricken Cyprus, lower demand from emerging markets, and signs of recovery in the US. The steepness of the drop has been exacerbated by investor loss-cutting sell-offs, and also reflect how high the price has risen. A correction of some sort may have been in the offing anyways. “The gold market is at or near the bottom,” said Rob McEwen, President and CEO McEwen Mining. “Now is one of the more attractive times to be buying gold stock. And there’s a large disparity between volume, and gold stocks' performance. It’s at a historic gap right now. So there’s little downside on the stock: if you’re buying a big stock you can get a yield, if you’re buying a small stock there’s some attractive upsides.” In this scenario, gold miners in Mexico can push on with investments in exploration and output, while continuing to capitalize on the country’s competitive advantages as a producer, as they've done for centuries. Mining Leaders

feature interview

From Los Filos

and Beyond

With three mines in Mexico, Goldcorp is now the country’s largest gold producer. Horacio Bruna, Senior Vice-President, has worked for Goldcorp in Mexico since 2008. According to Bruna, the environments where Goldcorp operates have changed dramatically due to the firm’s strategy of sustainable prosperity forging strong community ties, even while one factor has been out of its control: water.

“T

he environment at Los Filos is completely different from when I started managing the mine,” says Horacio Bruna, senior vicepresident of Goldcorp's Mexico operations. “Locals used to block the roads at the drop of a hat, but now they defend them because their sons and daughters work in the mine.” For Bruna, the first thing on the agenda as manager of Los Filos was establishing a social pact with the community of Mezcala, Guerrero. He succeeded and Los Filos went from a small project to a stalwart of Goldcorp’s international operations. In 2012, Los Filos alone produced 340,400 ounces of gold from a combined open-pit and underground operation. When Bruna

started, the mine produced just 30,000 ounces yearly. Now it’s not only the scale of the mining operation that’s impressive, but for Bruna “it’s a point of pride that our mine was able to create enormous benefits and growth in the communities of Guerrero.” Community development via mining continues to be central to Goldcorp’s “sustainable prosperity.” And having built Los Filos into an efficient and stable operation, Bruna was promoted to the position of country manager. Today his focus is not only Los Filos, but rather on ensuring safety in all of Goldcorp’s Mexican projects and resolving the water problem at the company’s flagship mine: Peñasquito. On Bruna’s first day of work at Los Filos,

a worker was killed in the small processing plant, one of four fatalities that year. He made the immediate and controversial decision to cease all mine operations indefinitely until better safety procedures were introduced. Today, Los Filos is one of the company’s safest mines and Bruna intends to replicate the changes in all of Goldcorp’s mines. In 2012, Goldcorp saw its fifth consecutive yearly drop in the accident rate. Even so, statistics that look good on paper aren’t enough for Bruna, “Our accident rate has fallen by double every year, but the number of fatalities has remained the same for Goldcorp and the rest of the major mining companies around the world,” he explains.

horacio bruna

770,000-

800,000

GOLDCORP's expected GOLD PRODUCTION oz in MEXICO FOR 2013

Bruna’s concern arises from the fact that major companies are not focusing on reducing severe accidents, but rather the overall number. In contrast, Bruna’s approach is to reduce fatalities by focusing on “high-potential accidents,” those where by “some stroke of luck,” a fatality did not occur; for example, a rock-slide where luckily no one was standing below. His mission to uncover the cause of accidents is part of a strategy to improve safety procedures and, as a consequence, overall efficiency at Goldcorp’s mines. But while Bruna has been able to influence safety in mines, water remains an important and challenging factor. In July 2012, Goldcorp announced that its total gold production would fall 8% due to operational problems at its two most important mines: Red Lake, Ontario and Peñasquito, Zacatecas. Peñasquito is Goldcorp’s newest mine in Mexico and the largest open-pit in the country. Despite the size of its deposit, the mine showed its Achilles' heel during last year’s sequia, or drought. As the deposit at Peñasquito became better understood, the amount of process water required rose to 35 million cubic meters per year. With the drought, the company had no option but to scaledown operations to 105,000 tons per day, resulting in revised production estimates of 370,000-390,000 ounces compared to the original 2012 guidance of 425,000 ounces. Part of Goldcorp's water strategy centers on creating an ample supply of water for both the local community and the mine operations. Bruna remains optimistic that the issue will be resolved quickly: “we’re leveraging our past experiences at other mines across South America and we’ve learned to be very efficient with water,” he says, while noting that the mine still beat its revised guidance during the

Daybreak after an all-night shift at Peñasquito, Mexico's largest gold mine

drought and ended up producing 411,300 ounces of gold and nearly 20Moz silver during 2012. “While we’ve improved efficiency of our flotation processes, we’re concentrating on increasing our water supply and the capacity of our pumps,” he notes. The Cedros Aquifer, located at around 400 meters depth, is a large water source and there are currently three water-drilling companies onsite looking for new sources of water below. Production for 2013 is estimated at between 360,000-400,000 ounces of gold, 20-21Moz silver, 285-305Mlbs zinc, and 145-160Mlbs lead. Even so, production at Peñasquito has started slowly this year. In the first quarter of 2013 the mine produced 60,100 ounces of gold, compared to 112,900 ounces in the final quarter of 2012. Keeping in mind Goldcorp’s corporate goal to produce 4Moz of gold by 2017, the company has a portfolio of advanced-stage projects across the Americas that will broaden its production base and fuel growth. In Mexico, Goldcorp’s first mine, El Sauzal, in Chihuahua, may be nearing the end of its lifecycle, but the Camino Rojo mine

will more than make up for it. “Camino Rojo is our next mine in Mexico and I believe that it will be important to our global operations,” says Bruna. The deposit, 50 kilometers southeast of Peñasquito, has proven and probable reserves of 1.53Moz gold and 32.07Moz silver. Construction will begin in 2015, reflecting Goldcorp’s commitment to the future of mining in the country. During Bruna’s tenure as head of Mexico operations, Goldcorp has grown in sync with the national economy. “If one comes here with fear and hesitation then they won’t be able to function” he explains. “Goldcorp is very comfortable in Mexico because we’ve come to understand how to work here. It’s Goldcorp’s preferred country,” he adds. With Goldcorp operating mines in six countries around the world, the company’s permanent policy of “sustainable prosperity” applies equally to Canada’s First Nations and Mexican Ejidos. “Wherever we operate, our goal is to generate stability. The sustainable prosperity strategy is really simple: we focus on people, safety, and the community,” says Bruna. Mining Leaders

q&a

Alejandro Aboumrad CEO Minera Frisco

Frisco's D i s co

Minera Frisco’s wealthy mining history stretches back to the mid-17th century, when it began operations in Mexico’s Chihuahua state. Carlos Slim acquired the company in 1984, before its spin-off in 2011. Despite the recent gold crash, Frisco has aggressively pursued an expansion of operations under the leadership of its CEO, Alejandro Aboumrad, and shows no signs of slowing down. Why did Minera Frisco split from Grupo Carso in 2011? Minera Frisco became part of Grupo Carso in the mid-1980s. Over this period, we experienced continued stability, aside from the typical peaks and troughs that mirror the movements of metal prices. When metals prices started rising significantly, Frisco was ready to take advantage with the two assets in its portfolio. We took the plunge and decided to focus on mining. But to do so, the company decided it needed more agility and independence—the catalyst behind our decision to spin-off from Grupo Carso and Grupo Condumex in 2011. We then listed on the BMV and spent $3 billion aggressively pursuing the expansion of our assets. We now control six projects and have tripled our production capacity. Does the fall in your gold production signify your intent to become a multi-metals producer? While we produce some lead and zinc, our expansion plans are firmly focused on gold and silver. Our gold production fell in the fourth quarter of 2012 because we've been in a period of transition; we needed to slow down so as to complete investments. Now, with the expansion nearly complete, we’re going to ramp up gold and silver production for the remainder of 2013. We intend to double our production of precious metals.

Did you take any steps to protect yourself from the gold price crash? We were partly protected through hedging with collars. There is a ceiling and if the prices go through it, we sell at the ceiling price. If they drop through the floor, we receive the floor price and no less. So we were protected from the gold crash by the floor price. Most Mexican companies don’t hedge metals prices, but our expansion plans dictated that we take precautions. You acquired Ocampo mine from AuRico Gold in October 2012, despite its operational problems. What were your main reasons for the acquisition ? Acquiring Ocampo played into our regional strategy, but we’re also convinced that there are synergies between El Concheño and Ocampo. It’s definitely a challenge, as Ocampo has both open-pit and underground mines, but we have the skills to operate it. And it furthers our objective to grow our gold and silver production. We believe that by bolstering our training programs, we’ll increase employee retention rates and insulate ourselves from future staff turnover. Regarding production, which is now stable, the lag we initially saw was a result of making the necessary underground installations to assure future growth. We have lots of concessions next door and the entire surroundings will eventually be integrated into Ocampo. El Concheño on the other hand, will begin production in the summer of 2013. Canadian miners issued $16.5 billion in debt. Why are big miners choosing debt over equity as a means of finance? Clearly, there’s cheap debt available and it’s what let us refinance debt at very attractive levels. It’s not exclusive to the mining industry. We see it as an excellent opportunity for Mexico to finance its growth across many sectors. For instance, we acquired Ocampo on credit and have also used it as an opportunity to refinance our short-term debt.

Why are so few mining companies listed on the BMV? While it’s not expensive to list, the BMV simply isn’t a market for mining. We’re listed in Mexico because our shares were tied to Grupo Carso, so when we split they transferred to us. If we decide to dual-list we’d probably be looking at New York or London. It's an idea that’s on the table, but we need to become a larger company before we make the plunge into a more miningdedicated market. With Mexico’s copper production increasing, do you think it's necessary for the government to encourage a market for finished products? Boosting that type of internal growth would be good for Mexico, but it’s more important for the government to encourage the growth of copper mines. They should incentivize production of copper and all metals. We’re developing one of the biggest copper mines in the country at Tayahua. It’ll have a capacity to process 15,000-20,000 tons per day of ore via underground workings. We would like to start constructing two other copper mines, but government incentives would help. Incentives for building mines are more important than those for the final product. Of course, it wouldn’t hurt if there was a large internal market. With 100 percent of its assets in Mexico, Minera Frisco will be more greatly affected by the mining royalty than more geographically diversified Mexican companies. How do you plan to minimize its impact?

Everyone will be impacted by the mining royalty, but community participation in the mining process should be encouraged. Collectively we should be thinking how investment actually reaches communities. They need to benefit. But above all, the law needs to incentivize a generation of projects. We need a formula that encourages concessions to be developed quickly instead of remaining in the exploration stage—often the situation in our country. Proportionally there’s very little development, and the new law should encourage greater production. Investment and job creation are important. But incentives should be comprehensive and ensure that education, health and infrastructure are all developed to ensure the wellbeing and prosperity of local communities. We are doing what we can to provide infrastructure, education, technical training and healthcare for communities in proximity to our projects. However it would be good to see the government provide more assistance with the proceeds of the royalty. Grupo México and Peñoles are both investing in wind power to insulate themselves from Mexico’s high-energy costs. Where do renewable energies fit into Frisco’s energy strategy? Many companies, across sectors with high-energy costs, are looking for inexpensive alternatives to reduce the financial strain. We’re currently examining a whole host of different technologies to assist in lowering our energy usage. Even so, wind power is not currently part of our strategy and we will probably pursue an alternative option than that of Grupo México and Peñoles. Mining Leaders

Project focus

Alamos Gold Ticker

TSX, NYSE: AGI

Locations

Mexico, Turkey

Operation

Mulatos mine

Development Projects

Turkey

Proven and Probable Reserves

2.37Moz at 1.07g/t Au

2013 Production Guidance

180,000–200,000oz at cash operating costs of $415–435/oz

Mulatos mine

In 2003, under the leadership of president and CEO John A. McCluskey, Alamos Gold defied pessimism over the deflated gold sector and acquired the Mulatos deposit in Sonora, Mexico, for $10 million. While considered a risky venture at the time, Alamos' gamble has since been converted into a tidy reward: in 2012 the company recorded its one-millionth ounce of production and billionth dollar in revenue. When Alamos acquired the project, gold was sitting at around $300 dollars per ounce. “No one was interested in the gold sector, no one was interested in Mexico, and no one was interested in Mulatos,” said McCluskey. Yet the project contained roughly 3.5Moz of resources in one of the most important mining districts in Mexico. Moreover, while production began in 2005 with a nine-year mine life, Mulatos has proven to be the gift that keeps on giving, with reserve estimates indicating the project has another nine years of mine life left in the tank.

While considered a chancy venture at the time, Alamos' risk has since been converted into a tidy reward: in 2012 the company recorded its one-millionth ounce of production and billionth dollar in revenue.

John A. McCluskey President and CEO Alamos Gold

The project’s longevity is in large part due to continued exploration success at Mulatos, with the company either increasing or replacing mined-out reserves in each of the past five years. Another contributing factor is the mine’s history of positive ton, grade and ounce reconciliation relative to the block model, indicating that the company is mining more gold than predicted by the reserve model. The firm has found a far higher degree of oxidized material in

Mexico than expected, even in the mixed zone that was expected to predominantly contain sulphide material. Additionally, Alamos said it was expecting a sulfide recovery rate in the high 40s to low 50s, but ended up with a rate in the high 50s to low 60s. In combination with a new gravity mill to process ore from the Escondida high-grade zone in early 2012, production skyrocketed to a record 200,000 ounces in 2012. On all accounts Alamos had a strong 2012 and this success is continuing in 2013 with record first quarter production of 55,000 ounces at cash costs well below the industry average. Strong production results have led to finances performing better than predicted. Alamos has paid a dividend for over three years and recently announced a share buyback program. The company is traded on the TSX and in early 2013 made the move to dual-list its common shares on the NYSE. Alamos has approximately $500 million in cash and short-term investments and is debt-free, putting it in an excellent position to fund its next phase of growth in Turkey while pursuing additional opportunities, such as the early July acquisition of Esperanza Resources for C$69.4 million. The purchase brings an advanced-stage gold project in Morelos into Alamos' portfolio, and with the firm's track record of low cost production in Mexico, bodes well for strong growth in the future.

Project focus

McEwen Mining Ticker

NYSE: MUX,TSX: MUX

Location

Sinaloa

Resource

M&I: 566,608oz Au & 53.1Moz Ag

Development 2013

Develop phase 2, produce 27,310oz Au from phase 1

El Gallo

At the end of September 2012, McEwen Mining recommissioned its El Gallo project in Sinaloa. “We had to make some investments, but for the most part we just flipped a switch and production resumed,” explains Euridice González, McEwen Mining’s country manager. McEwen Mining (then called US Gold) had originally acquired the El Magistral section at the El Gallo complex in 2007, a mine in operation until 2005, when problems with metallurgy and low gold prices made the mine uneconomical. Though the mine was closed, the material previously deposited on the leach pad continued to be processed for another year. But in 2010, the price of gold began to rise, US Gold became McEwen Mining, and the following year the company’s managers returned to El Magistral for a second look. “We did a little exploration and discovered a new deposit 7 kilometers from El Magistral,” says González. “That was El Gallo.” After considering the distance between the two deposits, McEwen’s management decided to upgrade the existing mill at El Magistral to process ore for the entire complex and to mine it in two phases. The first began in January 2012, with the goal of increasing production at the El Magistral mine to 3,000 tons per day. “We’ve reached

We had to make some investments, but for the most part we just flipped a switch and production resumed.

Euridice González Country Manager

McEwen Mining

full capacity and are building up the rest of El Gallo quickly,” says González. McEwen is now focused on developing the second phase, which will process the El Gallo and Palmarito deposits. In September 2012, the firm released a feasibility study outlining annual production of 135,000 ounces gold equivalent at $600 per ounce. Second-phase production will likely begin in 2014; González is now finalizing the

environmental impact assessment and the technical study for the change of land-use permits. In early April, McEwen announced drill results on the complex’s central zone, the area between the El Magistral and El Gallo pits. Since 2008, the company has drilled over 200,000 meters in its mining concessions. “The drill results show that the deposit is far deeper than we thought and likely connects the two pits,” explains González. “Our geologists are evaluating the rest of the project, trying to connect the dots and find the mother vein.” At another target, Twin Domes, 14 kilometers west of El Gallo, sampling showed strong gold values. With plenty of upside and the first phase running smoothly—it has a life of mine of eight years—González is concentrating on building up the rest of El Gallo and mapping out the next big discovery.

El Gallo Complex (Production Areas + New Potential)

McEwen (100%) Phase 1 Production Phase 2 Production Outside Mine Plan

Chapotillo San Jose Alamo El Gallo

Los Mautos Haciendita Mina Grande El Magistral

Palmarito Las Milpas

San Dimas

Mining Leaders

lead issue

Rising Royalties

With regard to the new tax on net revenue proposed in article 27 bis: it will be payable yearly and equal 5% of the result of subtracting gross income from minerals sales and expenses incurred in earning such income (regardless if the payment is done in cash or with good), including income from the sale of property, real estate, fixed assets, stocks, recovery of insurances or performance bonds payments, etc. The concession holder may be entitled to make deductions according to the rules of article 29 of the Income Tax Law, for example discounts made, the cost of the goods sold, insolvency credits, losses, bonuses paid to employees such as seniority bonds and taxes paid to socialcomParátive security bodies. tax rates (2010) The addition of article 27 ter, may be understood as a penalty for mining concessions holders who do not perform activities to explore or to exploit the mining lot, and they shall pay 50% or 100% in addition to regular mining fees, in accordance with the following criteria:

Courtesy of: The House of Representatives' Commission for Revenue, Public Credit and Economy submitted its proposal to make amendments to the Mining law and Tax Coordination law, in order to create an obligation for mining concession holders to pay a yearly fee equal to 5% on net revenues of mine activity. On April 25, 2013 this proposal was approved by the House of Representatives and now must be reviewed and approved by the Senate when the parliamentary session resumes in September. The proposal is to change articles 6 and 27, and to add articles 27 bis and 27 ter, to the Mining law, as follows: Article 6 currently states: “The exploration, exploitation and beneficiation of the minerals or substances referred to in this Law are public utilities and will have preference over any other use or utilization of the land, subject to the conditions established herein, and only by a Federal Law may taxes be assessed on these activities.” Now, lawmakers propose removing mining’s preferential status on land use, erasing the emboldened segment above. With regard to article 27, it currently states that an obligation of the mining concession holder is as follows: “(…) II. Holders of mining concessions, irrespective of the date of their grant, are required to: pay the mining duties established in the applicable law”. Here the proposal to remove the emboldened phrase and the addition of articles 27 bis and 27 ter, creates an obligation for mining concessions holders to pay a special yearly tax equal to 5% of net revenues of mine activity. Additionally, the proposal attempts to impose a new fee in cases where mines have not been explored or exploited within a two year window. This new fee will equal 50%-100% of the current fees and shall be charged in addition to regular fees.

i) Concession holders that do not operate during the first two years of an eleven year concession shall pay 50% of the toll, as ruled in article 253, paragraph VI of the Federal Fees Law. ii) Mining concessions in the twelfth year or more of the concession shall pay 100% of the quoted fee. The Tax Coordination Law will in all probability undergo several changes to articles 2 and 25, and additionally article 47 bis. Seventy percent of the fees collected are destined for a Sustainable Regional Development Fund for Mining States and Municipalities, with 30% going to the federal government. The state and municipalities where the mining activities took place will split the collected sum with the goal of promoting investment that contributes to positive social, environmental and urban development. In order for funds to be properly invested, each state will form a regional development committee for mining zones. The presiding member will be a representative of the Secretary of Agrarian, Territorial, and Urban Development (Sedatu) while the committees will also include one representative from both the state and federal government, the local municipality where mining takes place, along with—when applicable—a representative of the community, and finally a member of the mining company. The funds mandated by articles 27 bis and 27 ter of the Mining Law shall be used to create investments that stimulate social, environmental and urban development. Examples include the construction, remodeling and furnishing of schools; paving and maintenance of roads and infrastructure; water purification plants, drainage systems and air quality systems; projects that preserve nature including reforestation and rehabilitation of water sources; and projects that facilitate create urban transportation including railway networks.

Income Tax

Workers Profit Sharing

Total Tax

Royalty on extraction

Fiscal Stimulus

34%

2% – 3% of sales

Preferential depreciation on exploration

18% Federal plus 10% –16% State

28% – 34%

2.5% – 7.5% by territory

Credits for investment and accelerated depreciation

Chile

17%

0% – 5% of operating margin

Special rights for investors including invariable tax rates

Colombia

33%

12.5% – 18.6% on federal lands

none

USA

35%

1% – 12% of production value

none

Mexico

30%

10%

40%

Surface payments per hectarage

none

Perú

30%

38%

1% – 3% of total sales

Special rights for investors including invariable tax rates

South Africa

28%

5% on refined minerals and 3% on non refined

Deduction of capital investments

Country Brazil

Canada

Ron Tremblay President & CEO Levon Resources

Mexico has a tradition of high grade deposits. Newer deposits, like La Herradura, are lower grade and require economies of scale, making them more susceptible to royalties and taxes. Hence it's the largest producers, who employ the most people and create the most capex, rather than the smaller producers with high-grade mines, who will be more impacted by any tax increase. The royalty will work in the opposite manner to its original intention. Rob McEwen President & CEO McEwen Mining

Unfortunately, political movements tend to be lagging indicators; they react after the fact. The royalty is a disincentive at a time when exploration and development funds are scarce. There hasn’t been the expansion of margins that justifies saying “well these people must pay more.” If Mexico wants investment, barriers to entry should be lowered to ensure it remains destination of choice. But it’s easier to go after a foreign investor who can't vote, and just take, as it’s expedient.

Horacio Bruna Senior Vice-President, Mexico Goldcorp

The mining law affects juniors the most. Juniors bring new investment. When drafting the law, lawmakers didn't consider the real motor of growth. Peñasquito originally started with a junior and now it’s one of the largest goldmines in the world. Distancing juniors risks the future discovery of “monster” projects. However, miners that are already operating will not be severely affected. Alejandro Aboumrad CEO Minera Frisco

The royalty should be a formula that encourages concessions to be developed quickly instead of stalling exploration projects—as is the reality in our country. There are lots of concessions granted here but perhaps only 20 percent see activity. There’s very low development so the law should encourage production. Investment and job creation are priorities along with the community wellbeing in terms of education, health and infrastructure. Mining Leaders

Source: Camimex

lead ISSUE

GOLD

exploration

THE FRONTIER

Mexico’s stable political framework, infrastructure and centuries old mining tradition have made the country the top exploration district in Latin America and fourth in the world. According to the SNL Metals Economics Group, 6%—or $1.296 billion—of the total $21.5 billion in global exploration budgets was destined for Mexico. Even with exploration slowing, the country continues to host 1,526 projects from 201 mining companies listed on the TSX and TSX-V. In 2012, 29 new companies listed, yet onlookers are waiting to see if the Senate modifies the mining law this coming September. Regardless of a change in the regulatory framework, Mexico will remain more competitive than either the United States or Canada. The headline-making development currently underway is Chesapeake Gold’s Metates mine in Durango. The huge deposit will require total capex of $4.3 billion to develop. Due to the mine’s hilly locale, infrastructure will be more expensive and require a pipeline to transport material to processing. But the rewards promise to be substantial, with Metates expected to produce more than 845,000 ounces of gold a year, double that of Peñasquito, Mexico’s current biggest mine. Torex Gold’s Morelos mine in Guerrero is another notable project, needing around $675 million to bring into production. Gold exploration usually occurs in Mexico’s established mineral belts, yet there are new opportunities for investors in promising “frontier” areas— including the Guerrero Gold Belt—where New Strike Capital has been particularly active in acquiring concessions. However, the area has an unstable security situation, deterring many entrants. Another traditionally non-mining state, Puebla, hosts Almaden Mineral’s flagship project, Ixtaca. Yet other unexplored regions of the country may see less exploration as drilling programs are slashed in the current financial environment. Many predict exploration shifting towards brownfields near existing mines in established districts, with producing companies already taking the lead, for example Goldcorp at Noche Buena, near Peñasquito. There are a few projects in advanced stages in existing production zones already showing potential. Analysts disagree on the outlook. While some say that gold may have lost its luster in the long-term, as other asset classes and indeed luxury products have emerged to challenge its status, others feel that the correction is near its end as of mid-2013. Much may depend on the next moves by the US Federal Reserve on quantative easing. Certainly, junior mining firms in Mexico and elsewhere are particularly feeling the pinch. In this context, government pressure on costs is not ideal. But some in the sector are hopeful that the market recovery is not too far off.

company focus HERMOSillo

Riverside Resources Ticker

TSX-V: RRI

Company type

Prospect Generator 25 properties in Countries of operation Mexico, Arizona & British Colombia

mexico CITY

Strategic Alliances

Cliffs Natural Resources, Antofagasta

Riverside Resources Sonora, Mexico will always be a region of strength for Riverside Resources, the Vancouver-based prospect generator. It was the company’s president and CEO, John-Mark Staude, who made his start with the US Geological Survey by mapping the Sonora Megashear, a belt hosting over 30Moz of gold. “I’m not saying I discovered the Sonora Megashear, but I did spend countless hours compiling data and carefully researching the regional potential more than two decades ago,” he says. Staude’s database totaled about 3,000 properties in the 1980s, and has since grown to over 60,000 locations, becoming a significant resource for Riverside. Riverside owns nine projects in Mexico, most of which are available for joint venture. As its forte is exploration, the company meticulously selects prospects from its databases before bringing them to the drill stage. It will then usually seek out a partnership to finance the project’s development. In 2010, Riverside was hired and funded by Kinross Gold to review and generate properties in Mexico's Mesa Central region. Today its active alliances in Mexico are with Cliffs Natural Resources and Hochschild Mining. Meanwhile, in British Columbia, Chile’s Antofagasta signed a three-year, $1.8 million agreement to fund Riverside in a joint search for large copper-gold porphyry systems. Riverside also has two other joint venture partners funding further work in Mexico.

I’m not saying I discovered the Sonora Megashear. I just compiled the data and let it speak for itself. John-Mark Staude President & CEO Riverside Resources

In Durango, Riverside and Sierra Madre Developments have been drilling the Peñoles project. Drilling is planned to continue in 2013 to test the bulk-tonnage gold oxide deposit and Jesus Maria silver mine targets. Riverside and Guerrero Exploration are busy working on the Cerro Azul project, a copper-gold play. Though its name means blue hill in Spanish, the exposed rock appears more red in color, with reported copper rock chip samples as high as 10.26%.

On average the company has maintained around five to seven active JVs, which has led to a ratio of $5 of partner money into the ground for every $1 spent by Riverside. “We’re a small prospect generator with a focus; it’s about sharing the risk and generating upside at a low-cost for shareholders,” says Staude. “Anytime the ratio is greater than threeto-one, you’re doing well. We’ve had years where the ratio was as high as tento-one and other times like 2008 when it’s been really tough.” Riverside’s financials are strong with $6 million in the bank, an amount sufficient to continue for several years at the current burn rate. The year 2013 will be a busy one for Riverside, with newsflow from at least five partner-funded drill programs and continued growth and upgrades to an already strong property portfolio. In Staude’s words, “The projects are almost like airplanes ready to land, but right now they’re circling for capital.”

Mining Leaders

q&a

Morgan Poliquin President & CEO Almaden Minerals

RISING IN THE EAST

Duane Poliquin, Almaden Minerals' founder, spent the 1970s exploring Mexico before acquiring La Trinidad gold deposit in 1992. In the 1990s his firm began prospecting for precious metals in eastern Mexico, to considerable success. Almaden has since sold eight of its projects, retaining the royalties, and formed JVs on several more. Under Duane’s son, Morgan, the firm is now focusing on its biggest discovery to date: the Ixtaca gold-silver project. Mining has taken place in Mexico since the 1500s. As a prospect generator, why focus on a country with such a long mining history? Mexico has been underexplored in the 20th century and boasts excellent geology. Geology doesn’t stop at borders: the mineral deposits in western Nevada and eastern California were what made the American West in the 19th century, but far bigger deposits were found in eastern Nevada in the 1900s. But for political reasons, modern exploration in Mexico was limited in the 20th century; only in 1992 were foreign miners allowed to take 100 percent stakes in projects. Thus Mexico missed the porphyry boom of the 1960s, when advances in geology led to a proper understanding of these complex deposits and the development of thousands of global porphyry mines. When the country opened to exploration in 1992 most foreign firms went to the west. After doing a MSc degree studying gold deposits in the South Pacific I identified similar rocks in eastern Mexico where exploration had been even more limited. I spent 10 years exploring from border to border using a helicopter; often we would find previously unexplored mineral prospects just sticking out of the ground. In recent years many new discoveries have been made around to existing mines. But our Ixtaca project is a genuine, grassroots discovery. Almaden decided to drill out Ixtaca itself. Was this an unusual step for a prospect generator? The term “prospect generator” literally means that you find your own prospects. It doesn’t say anything about drilling. Relying on a partner to drill hasn’t proved successful. In the past we would create JVs with a junior and maintain an interest, normally around 40%, but we feel that’s not a great way to make discoveries. Since 2008, juniors have found themselves in a tough market. Some of our partners stopped drilling; some disappeared. Drilling one or two holes to test the concept is far cheaper than waiting a year for your partner’s drill program. We own our own portable drills that have a low ecological impact because they don’t require road building, but can still go to 600 meters. This allows us to drill well below market rates. This technology allows us to rapidly test targets and eliminate areas, increasing our chances of a discovery by making more shots on goal. Despite the bad market, this strategy has resulted in great capital gains for our shareholders.

What’s Almaden’s exploration plan? Ixtaca was a blind discovery with no mineralization at surface. After looking at clay alteration studies from New Zealand, where mud pools pushed up gold through thermal springs, we began to suspect that the clay alteration at Ixtaca signaled potential gold mineralization at depth. The concept proved correct: the first hole hit significant gold and silver. We have a large land package acquired through staking which we think holds the potential for additional discoveries. How will the proposed introduction of royalties affect explorers? We still don’t know details about how the royalties will be introduced. However, these measures are proposed by politicians who may not fully understand the risk in this industry. I believe politicians regard mining as similar to the petroleum industry. Around the world, many mining projects are marginal; to take a mine to production requires huge capital expenditure up front. Taxing profits net of debt payments, when a firm still has enormous debts to clear, can drastically change the economics of a mine. The government may well be able to get more money out of existing mines, but likely hasn't considered the new or marginal projects that might never make production because of this legislation. Mexico is currently seen as good place to operate a mine for excellent reasons, so why kill the advantage? With a number of recent anti-mining protests in Mexico, how does Almaden plan to build strong community relations? As an explorer, our advantage lies in arriving first in the community, allowing us to easily refute the false claims and misinformation spread by the anti-mining NGOs. We, like most exploration companies, undertake social investments in our communities and we particularly focus on education. Mining investment improves infrastructure, social welfare and provides a regulated, environmentally controlled industry with low land use. Mining has lower ecological impact than many subsistence farming practices utilized in rural Mexico. Mining jobs pay more than other sectors of the economy as well. We view the communities we work in as our partners and we focus on creating awareness of these facts and the true benefits and changes that come about through mining development.

MARKET FOCUS

DRILL SergeanTS

The diversity of drilling companies reflects the terrain where they operate. Large multinationals like Boart Longyear, Major Drilling Group International and Cabo Drilling established bases in Mexico during the exploration boom. But the downturn now has drillers preparing for a slow year. Many explorers have scaled back or halted programs. The drop is worrying for some: “three years ago we had to fight to hire a drilling company,” explains the CEO of an intermediate silver producer. “Now they call us to say they have drills available on open-ended credit. We’ve hired two different companies at one mine so that they compete.” While Mexico’s terrain presents unique difficulties, the wealth of expertise in the country enables creative solutions like drilling in the steep canyons of the Barrancas del Cobre. Rafael Gutiérrez Medina President Itzcoatl Drilling

We adapted our Zinex A5 drill rig on remote controlled tracks because it leaves a far smaller environmental footprint than rigs on skids and offers more safety than man-portable rigs. Through our conversations with miners, we’ve found environmental permit applications can be easier to secure with smaller rigs. The sector expects the permitting process to become more challenging this year. The rig is also very reliable as it lacks the electronic components that leave other rigs offline while waiting for a technician to arrive, increasing up-time and efficiency which help us achieve our philosophy of continuous improvement.

Federico Laage Contesse General Manager Boytec

Boytec has 42 drill rigs in Mexico to offer nearly every kind of drilling service for our clients. In 17 years of operation, we’ve drilled about 2.5 million meters in almost every state in Mexico. Our Chilean parent company, Geotec Boyles Bros, assists us directly by providing technical services and technology and equipment. In recent years, Mexico has seen a bonanza of exploration due to the increase in the price of gold and the discovery of new deposits. The boom in exploration has been very important for the company and today about 70% of our activity is surface diamond drilling, and 30% rotary drilling.

Brenda Carranza General Manager Falcon Drilling

The president and vice-president of Falcon Drilling, brothers Gary and Grant Paulson, were previously helicopter pilots transporting drills to remote parts of Canada. They realized that there was a need to change drill weights and dimensions to facilitate easier transport by helicopter, and Falcon Drilling was born. Our in-house innovation resulted in the F1000, F2000, F3000 and F5000 drills. Some of the challenges we’ve faced in Mexico include antiquated workings, difficult access, fractured rock and muddy-sand areas. But with our expertise there’s always a way to get the drills in and the job done. Mining Leaders

company focus

Tamino Minerals Ticker Properties Group Companies

OTC: TINO Amalia, Cubabi, Veta Verde Maya Gold VM International

Tamino Minerals “Looking across the US border from Sonora into Arizona, you will see several major producing mines, including ASARCO’s Silver Bell, Duval-Sierrita and the San Manuel copper mine,” says Pedro Villagrán-García, president and CEO of Tamino Minerals. “Although Sonora is a leader in gold and copper production among Mexican states, very few juniors are undertaking serious exploration in the area—and the reason for that is security.” Tamino Minerals, which listed on the OTC Markets Group in October 2012, is one of three sister companies focused on mining projects in the highly prospective Sonora desert. The group’s other companies include Mayo Gold, a private explorer holding two concessions in the region, and VM International, a consulting division dealing with exploration and security issues. The formation of VM International— with a pool of 300 consultants, many of whom are experts in local security

To grow at 6%, Mexico needs to focus on strategic industries and improve security. If we can’t provide security for investors and geologists, mining will fail to reach its true potential. Pedro Villagrán-García President & CEO Tamino Minerals

issues—has proved key to securing the fortunes of the firm’s two mining companies. The Sonora desert is a major hub for drug smuggling and human trafficking to the United States, and Villagrán-García has contracted a security team made up of former government agents and special forces personnel. For firms able to control the security of their operations, the advantages of operating in Sonora are obvious, according to Villagrán-García.

Tamino Minerals Project Locations cubabi amalia

sonora hermosillo

Numerous multimillion-ounce deposits have been discovered under just a few meters of sand in the desert landscape. Despite low grades, the low production costs have drawn comparisons to Nevada’s Carlin Gold Trend. The region also has a strong background in mining; new projects usually enjoy the support of local communities who appreciate the potential economic opportunities brought to the area, says Villagrán-García. The group’s junior explorers are focused on two projects. Tamino Minerals has set aside $1 million exploration budgets for each of its projects. The Amalia project will be subjected to induced polarization (IP) geophysics and 2,500 meters of drilling, with an eye to entering production in the beginning of 2015. The project is focused on gold and silver but also indicates significant copper, lead and zinc resources. The firm’s Veta Verde project is an early stage copper play, with most of the exploration budget earmarked for IP geophysics to identify new targets. Mayo Gold’s Papago project benefits from results from a previous 1,500 meter drill program; the firm is identifying new targets before embarking on a 15,000 meter drill program and aims to start producing in 2017. Next door to Papago, the San Marcial project, formerly owned by Teck, hosts fine grain deposits. In early 2013 Mayo Gold was looking to raise $800,000 in pre-IPO finance before targeting a $3 million IPO in mid-2013.

box

STUCK IN THE MIDDLE

Guatemala alone produced 400,000 ounces of gold and 8.9Moz silver in 2012, dwarfing the collective output of all of other Central American nations. Even so, such production merely scratches the surface of the country’s rich geological potential. Its potential is shared by the region as a whole, but seemed out of reach due to a combination of institutional indifference, political instability and weak metals prices throughout the 1980s and 1990s. And yet mining was once an integral part of many Central American economies: 55% of Honduras’ export income in the 1880s was derived from the output of a single silver mine, El Mochito. However with the recent political changes sweeping through Central America, there are signs of a mining resurgence in the region. In early 2013, Honduras approved a new mining law, ending the moratorium that had effectively frozen the sector’s development. Also, Nicaraguan President Daniel Ortega has adopted a strong pro-mining stance, and analysts have lauded the country’s exploration permit process for its relative simplicity and efficiency in comparison to its regional peers. Gold is now Nicaragua’s third-largest export and numerous mining companies, including B2Gold, have a presence there. Panama has also undergone a rapid and remarkable turnaround—from exporting zero minerals before 2010 to gold becoming its biggest export in 2011. In 2012 the yellow metal constituted 14% of the country overall exports. There are still significant roadblocks to mining in the region. Legal wrangling between various governments and mining companies—Pacific Rim’s lawsuit against El Salvador is an example—is a relatively frequent occurrence, indicating a lack of clarity in regulatory frameworks throughout Central America. There are also social obstacles, as recent community unrest in Guatemala over Tahoe Resources’ Escobal silver mine illustrates. Violent protests against the mine’s construction erupted in May, prompting President Otto Pérez to declare a state of emergency, bring in the military and increase police presence in the territory. Nevertheless, Central America is becoming a highly appealing destination for mining investment. And continued consultation between governments, miners and the community should ensure that such hurdles are merely teething problems, as the economic benefits of mining become increasingly evident. Mining Leaders

analysis by Guillaume Corpart Managing Director Americas Market Intelligence & David Robillard Managing Director MultiLatin Background Screening

A history of violence

Violence in Mexico has been rising for the past 15 years, a result of shifting political power and institutional fragmentation. Some wonder whether it could worsen. Yet there is reason to be optimistic, as the new government promises reform to a broken system.

ince 2005 the Mexican security landscape has been in constant flux, having reached record levels of violence during President Calderón's administration (2006-2012). The upsurge in violence has many causes, though most analysts attribute its root cause to the fundamental shift of political and institutional power in the country over the past 15 years. The fragmentation of public institutions began in earnest during the late 1990s when the PRI was still in power, primarily at the state and municipal levels. During the PRI’s 71year rule, Mexico’s power structure was top-down and monolithic, with Los Pinos (Mexico’s presidential residence) making every important decision. Law enforcement—as with all other public institutions at all levels—fell into line and carried out orders unconditionally.

The political fragmentation accelerated when the PAN was elected to power back in 2000 under Vicente Fox. Mexican politics became more chaotic, discordant and polarized, leaving the federal government less able to maintain stability and order in the country’s affairs than it had in the past. The erosion of traditional power structures affected many public institutions, particularly the management and coordination of law enforcement throughout the country. Uncoordinated policing activity and jurisdictional confusion undermined the effectiveness of the armed forces, police forces and the judiciary. A number of corrupt players began to emerge at all levels of society. Criminal organizations—and in particular drug trafficking organizations (DTOs)— took advantage of this opportunity to systematically corrupt policing entities

that they had already infiltrated, albeit on a more ad hoc basis. While estimates suggest that organized crime participates in up to 42 “lines of business,” the most important ones remain extortion, drug trafficking and kidnapping. There are approximately a dozen significant DTOs throughout the country of varying size and geographic reach. These groups are quite prone to fragmentation themselves, splintering and regrouping frequently, a prime cause of inter-cartel violence in the country. A risk to miners Today DTOs represent the principal factor affecting security in rural parts of Mexico. Consequently, the mining sector, due to the rural locations of its mines and its economic clout, has been at the frontline of security risks and threats throughout the country.

VIOLENCE IN MEXICO Annual Number of Murders by State

Mining operations have been able to coexist with local actors, be they ejidos, politicians, or DTOs. Experienced miners know that their success hinges on steering clear of spats with government or DTOs—the last thing they want is to become a proxy in the “war on drugs.” And while the mining industry has managed to adapt and cope with the evolving security threats in Mexico, it certainly imposes a burden and increases the cost of doing business. Many mining companies are looking with guarded optimism at the prospect of reforms and institutional changes under the administration of PRI President Enrique Peña Nieto.

Less than 500 500

-< 1,000

1,000 -< 1,500 1,500 -< 2,000 2,000 or more

DTOs are active in most mining regions in Mexico and they present both direct threats and indirect risks to mining companies. For obvious reasons, rural areas present ideal conditions for DTOs to conduct their activities out of sight. They often make use of secondary roads on mining sites in order to move their merchandise; they repurpose abandoned mining sites to provide cover for laboratories, and use lands adjacent to mines for growing opium poppies and marijuana. As a result, for many mining companies, DTOs have become uncomfortable neighbors presenting three major threats, including: theft of equipment, extortion from local political interests and violence. The dynamics between municipal and state governments, local community leaders and non-governmental organizations, has created another set of challenges for mining companies. In particular, there is a tenuous relationship between the federal government— which grants mining concessions—and local communities, whose dwellings, customs and rights often stand in the way of industrial development. Once concessions are granted, several actors become involved and can cause

the local cantina is not an effective way to make new friends.

delays or problems. In many parts of Mexico, communal lands used for agriculture—known as Ejidos—also happen to be the prime regions for mining firms aiming to exploit the land. Ejido leaders have a certain degree of political and legal power, though it is often tenuous. Many of them unsuccessfully attempt to placate wide portions of the population, causing widespread discontent. Moving forward Many miners have realized the benefits of projecting a modest attitude. Mining companies will typically signify their presence with a foreign flag, then keep their heads down. Mining wages, infrastructure and equipment tend to be conspicuous reminders of inequality between the mining company and the local community. Discreet use of new vehicles or machinery goes a long way to reduce the likelihood of theft. Investment in community relations, outreach programs, employee education and awareness programs will help build communities and long-term relationships. Mine employees and contractors are local ambassadors—their actions and behavior are interpreted as being those of the mine. “Playing hard” at

Going forward, President Peña Nieto has proposed establishing a centralized police command, Mando Único Policial. This centralized command would consolidate approximately 1,500 municipal police forces into 32 unified state bodies, thus avoiding jurisdictional overlap. Moreover, he has presided over the “Pact for Mexico,” a political agreement among the three leading parties to back key reforms to the Mexican economy. Both initiatives signal a desire to arrest the two decade-old fragmentation of political and institutional power. How quickly it will bear fruit is anyone’s guess, but mining companies have invested over the long term and are eagerly awaiting positive signs of change.

Americas Market Intelligence is a research and intelligence agency which evaluates market risk and provides insight on strategic opportunities in the Americas.

MultiLatin Background Screening is a company focused on the screening of workers and trading partners through leading screening solutions.

Mining Leaders

Project focus

Chesapeake Gold Corp Ticker

TSX: CKG

Location

Durango state

Resource

Proven and probable reserves: 18.5Moz Au, 526Moz Ag and 4.2 billion pounds of zinc

Metates

By his own admission Randy Reifel, president and director of Chesapeake Gold Corp., acknowledges that low-grade, high capex projects are not currently flavor of the market.“Companies have struggled at building high capex projects as budgeted. Not surprisingly, the industry and investors prefer highergrade, lower capex projects at the moment,” said Reifel. However, Chesapeake believes that its Metates project in Durango state, with proven and probable reserves of 18.5Moz of gold, 526Moz of silver and 4.2 billion pounds of zinc, is not only viable, but could be the cornerstone of Mexico’s gold production for years to come. Chesapeake contracted M3 Engineering & Technology for the project’s prefeasibility study—the same company that designed and built Goldcorp’s open-pit Peñasquito mine. The PFS demonstrated excellent project economics at conservative long-

Metates is the largest undeveloped gold and silver deposit in Mexico,with superior project economics to most other worldclass deposits.

Randy Reifel President & Director Chesapeake Gold

term metal prices. The initial capex of $4.36 billion (including contingencies) is paid back in 4.1 years with a 21% IRR on a pre-tax basis. In the first six years of the mine’s life, Chesapeake expects production to average 845,000 ounces of gold, 25Moz of silver and 175 million pounds of zinc per year. The deposit’s highest grade and lowest strip ratio occurs in the first third of the project’s active mine life, contributing to $355 per ounce cash cost (net of zinc credits).

durango metates

mexico city

The PFS identified several factors that played a role in the project’s solid economics, as well as its design to the industry’s highest environmental standards. First, under normal rainfall conditions, natural run-off and recycling from a dry filtered tailings plant will meet the mine site’s annual water demand. Second, life of mine concurrent reclamation with the tailings and waste rock contained in one canyon greatly reduces the environmental footprint and potential future liabilities. Third, the processing site (Ranchito) is located beside a large high quality limestone resource. And it's close to key mine inputs, such as a power grid, natural gas pipeline, labor and transportation arteries. As a result, Metates enjoys very low cost inputs, most recently aided by the Mexican government's construction of a natural gas pipeline along the country’s west coast. “One day Metates will be one of the largest gold and top five silver producers in the world.” said Reifel. World-class precious metal deposits are scarce and it remains to be seen how many will realize production during the next decade. Metates has the strategic advantage of being in northern Mexico, and is believed by several mining analysts to be one of the first projects amongst its peer group to become a mine.”

company focus

Cayden Resources Ticker

TSX-V: CYD Morelos Sur & El Barqueño 10,000m drilling in each project

Projects Development

Cayden Resources Beneath the hills of Guerrero—named for the revolutionary general Vicente Guerrero, whose troops sheltered in the rolling terrain during the War of Independence—lie massive gold deposits like Goldcorp’s Los Filos, Mexico’s second largest producing gold mine. To date, 19Moz of gold has been discovered in the Guerrero Gold Belt (GGB), and Cayden Resources is one company that will surely increase this amount. Cayden was formed in September 2010; one month later, it acquired its first major gold project, Morelos Sur, for $24.5 million in cash and shares. “We’re looking for 5Moz-plus deposits,” says Ivan Bebek, Cayden's president and CEO. Within the company’s flagship Morelos Sur project is La Magnetita, the largest untested magnetic anomaly in the GGB, and the focus of exploration. Morelos Sur totals 14,500 hectares, but the main target is a 5.4 square kilometer hydrothermal system, which could very likely be a 5Moz-plus deposit. Apart from La Magnetita, there's also the Mina Verde zone, which already had an 80,000-ounce inferred resource prior to Cayden’s 2011 drilling, the results of which indicate that it's grown. Goldcorp’s Los Filos and El Bermejal pits lie due east of what Bebek describes as Cayden’s “oddly-shaped concession”—making Morelos Sur a natural takeover target. On February 1, Cayden sold two blocks that comprised

The question isn’t if there is gold in El Barqueño. It’s how much is there.

Ivan Bebek President & CEO Cayden Resources

15% of it’s concession, to Goldcorp’s Mexican subsidiary for $15.7 million, essentially ceding the entire eastern half to Goldcorp with the exception of Las Calles—which Cayden will sell next. Las Calles is a strip of mineralized ground between Goldcorp’s two pits. Given the appetite for acquisitions in Mexico, many will be watching to see if properties like Morelos Sur are snapped up for consolidation in 2013.

Cayden acquired its second property, El Barqueño, from Grupo México in 2012. “Because we had a great rapport from our work and completion of payments on Morelos Sur, Grupo México was confident that we would be able to follow through on a second deal on the El Barqueño property,” says Bebek. The company acted during a weakening gold market to option the property for $8 million over three years in a deal that took some time to negotiate. Cayden Resources is carrying out surface exploration activities and expects to start drilling in May. The project looks very promising given the historical data of Grupo México, which returned an average of 3.6g/t Au in a 290,000oz deposit. Sitting within an epithermal system in an area measuring over 70 square kilometers, El Barqueño could hold well more than 5Moz. “The question isn’t if there is gold in El Barqueño,” Bebek says. “It’s how much there is."

el barqueño

JALISCO

guerrero morelos sur

Mining Leaders

sonora

2 5

project roundup

sinaloa

michoacĂ N

chihuahua

morelos

Mining Leaders

The Esperanza gold project cost just over $35 million, and will go into production by 2015. It has measured and indicated resources of 1.5Moz and silver reserves at over 16.5Moz, and production will total 100,000 ounces of gold and between 300,000-500,000 ounces of silver per year. Esperanza’s mine life was originally estimated at six years but in September 2012, having upped the resource by 61%, we expect a significant increase in mine life and production, particularly of silver.

Greg Smith President & CEO

Ian Foreman President & Director

Orofino is an early-stage exploration property with more than six gold targets. Trenching confirms potential for the San Francisco target to contain a bulk tonnage style gold-silver target. Following an outcrop sampling of up to 2.70 g/t gold and 529.8 g/t silver over a length of 2.1 meters, a recent trench uncovered 0.67 g/t gold and 19.47 g/t silver over 25 meters that was open in both directions. San Francisco is defined by a 30 to 40 meter zone of strong oxidation that has been traced for over 300 meters along strike.

Alta Vista Ventures (TSX-V: AVV) Historic RES: No estimate 2013: Drilling

Orofino

Esperanza

Esperanza Resources (TSX-V: EPZ) RES: 1.5Moz Au & 16Moz Ag In. & If. 2013: Production by 2014

We now own the project 100% and have expanded our land position with the Tejo and Cortez target areas to take up over 20 kilometers of prospective trend along the Mojave Sonora Megashear. At Tajitos, there are a number of vein systems that were mined historically and we’ve identified a potential open-pit gold target that is now drill-ready. We believe that the property is fit for a major and are delighted to have such a high quality asset added into Riverside’s robust portfolio as a prospect generator company.

John-Mark Staude President & CEO

Riverside Resources (TSX-V: RRI) Samples include: 38.7 g/t gold & 383 g/t silver 2013: Ready to Drill

TAJITOS

When Tepal begins production in 2015, we estimate 117,000 ounces of gold and 49Mlbs of copper annually during its seven-year life. The financials are favorable with a post-tax $421 million NPV (5% discount), IRR of 28%, and a payback of 3.2 years. We will mine in three open-pits and process in a central mill, where sulphide recoveries come to 79% Au, 54% Ag, and 87% Cu. Cash costs net of by-product credits under the base case scenario in the PFS are expected to be $0.62/lb of payable copper.

Dunham Craig President & CEO

Geologix Explorations (TSX-V: GIX) RES: M&I: 1.8Moz Au & 809Mlbs Cu (4.5Moz Gold Eq) 2015 Q2: Production estimated to begin

Tepal

Tara currently has 100% ownership of a mega district covering 39 square miles in the Don Roman district of northeastern Sinaloa. The area is estimated to contain over 70-plus identifiable geological structures, which will be mined and processed at our centralized mill. Currently the mill can process 120 tons per day and in 2013, we are focused on production. Everything is in place, prep samples and work show grades of 400-600 grams per ton silver so drilling could yield a decent amount of tonnage.

6 David Barefoot COO

Tara Minerals (OTC: TARM) RES: Vein 770 g/t silver, 27% zinc, and 11% lead. 2013: Increase plant capacity to 2000tpd

don roman

Chris Crupi President & CEO

The San Miguel vein is very interesting because it’s readily mineable; it sticks out from the surrounding terrain by 80 meters. It’s the same situation with the Don Ese prospect: the ore can be trucked to a number of facilities, which means there’s no need to invest in a mining operation on our own. The preliminary mine life estimate is 14 years, but to be quite frank I believe this project will be around much longer than my lifetime.

Paramount Gold (NYSE: PZG) RES: 639,000oz Au, 53.6Moz Ag M&I Res 2013: Planned PFS

SAN MIGUEL

SILVER

lead article

The Heart of the Plata

Photo: Fresnillo

fter weeks of trekking through Mexico’s Sierra Madre searching for gold, Humphrey Bogart slumps to the ground and moans, “I’m thinking we ought to give up, leave the whole outfit.” His geriatric prospector companion, played by Walter Huston, bursts out laughing, dances a jig and shoots back: “you’re so dumb, you don’t even see the riches yer treadin’ on.” Sixty five years later, the scene from the 1948 film The Treasures of the Sierra Madre is one that many modern day precious metals explorers can still relate to. In mid-2013, shrinking share valuations and depressed metals prices were testing the fortitude of junior companies, even as the drill rigs tallied impressive results. And although Sierra Madre has sizeable deposits of gold, its real treasure has always been silver with Mexico, the world’s number one producer, long synonymous with the metal. The industry has seen centuries of booms and busts, but historical perspective holds little consolation for those firms facing shrinking margins and dwindling cash accounts. Mining Leaders

lead article Dolores. But these costs are usually calculated after discounting revenues received from by-products and the weakening gold price will push costs higher in 2013.

Photo: Scorpio Mexican miners are investing significantly in plants' infrastructure

The expansion of old mines and the commissioning of many more, has allowed Mexico to almost double its silver production in the last 6 years, from 2,350,000 tons in 2007 to 4,510,000 tons in 2012. The vast majority of this production comes from the states of Zacatecas, Durango and Chihuahua, where there is a strong culture of mining and many Mexicans employed at the sites are second or third generation miners. The world’s biggest silver producer, Fresnillo, is midway through the 10-year growth plan it set out at IPO in 2008. With production targets of 65Moz silver and 500,000 ounces gold by 2018, the company has performed well on the latter front. As the firm’s Saucito mine ramps up production and Noche Buena completed its first full year of operations in 2013, gold production jumped from 276,000 ounces in 2009 to 473,000 ounces by 2013. Meanwhile, silver production has remained steady at approximately 40Moz for the past five years, but with production at the San Julián mine scheduled for late 2014, total output should be boosted towards its target. Canada’s Pan American Silver and First Majestic Silver, along with US-based firm Coeur Mining, have also expanded their Mexico operations in recent years, but worsening macro conditions have taken their toll. Despite producing record volumes of silver and gold in 2012, Pan American’s

share price dropped 21% over the course of the year. Having breached $23 in late 2012, shares in First Majestic were trading at under $10 in June 2013. The mining sell-off and falling precious metals prices have left even major producers scrutinizing their bottom line. As of June 2013, when prices dropped below $20 per ounce, silver had been one of 2013’s worst performing commodities, shedding 34% of its value. At first glance this shouldn’t be cataclysmic news for producing firms. In 2012, First Majestic produced silver at cash costs of $9 per ounce. In 2013, Pan American’s estimated total cash costs per ounce range from $10 to $20 across its three biggest Mexican mines, La Colorada, Alamo Dorado and

Silver is a volatile metal and its underperformance in comparison to gold is expected in a bear market. With forecasts for the US economy starting to look more positive by mid-2013, many analysts believe that industrial demand for silver—which is much higher than gold—will lead it to outperform the yellow metal in the near future. However, a slowdown of the Chinese economy—the world’s second largest consumer of silver— could counterbalance the trend. What looks certain is that greater volatility of silver prices lies ahead. With a number of local and international silver-focused companies, Mexico stands in a relatively unique position. Seventy percent of the global supply of the grey metal arrives as a by-product of zinc, copper and lead mines and its production is subsequently tied to base metal demand. Meanwhile, delays in the development of two major mines in Argentina—Barrick’s Pascua Lima project and Pan American’s Navidad project—mean that calculations of future supply will have to be revised. The producers have cash in the bank and can hold out for an upturn in prices. In the meantime, they’ve been shopping. Although mergers and acquisition activity has been muted in the junior mining sector during 2012-2013, Mexico´s Top Silver Producers

Fresnillo

41 Moz

Goldcorp

23.7 Moz

Pan American Silver

12.5 Moz

Grupo México

9.84 Moz

First Majestic Silver

8.3 Moz

Coeur Mining

8.2 Moz

Endeavour Silver

4.5 Moz

Mining Leaders

lead article

Photo: Fresnillo Camimex is responsible for driving many of the safety improvements in Mexico's mining industry

the Mexican silver sector has seen some significant deals. In March 2012, Pan American completed the acquisition of Minefinders in a cash-and-shares deal valued at $1.5 billion. The deal gave Pan American control of the Dolores silver and gold mine in Chihuahua and the La Bolsa deposit in Sonora state. Minefinders had previously produced 74,000 ounces gold and over 3.5Moz silver in 2011 and the acquisition marked an important step in Pan American achieving their production goal of 50Moz silver per year by 2015. Meanwhile in Durango, one of the world’s largest silver deposits was subject to a bidding war. La Preciosa, explored and developed by Orko Silver, has combined indicated and inferred resources of 237Moz silver equivalent. Following its acquisition of Silvermex Resources in July 2012, First Majestic looked in pole position to acquire Orko when it made an all shares bid in December 2012. However, Coeur—the largest US-based silver producer—trumped the bid, offering $100 million in cash as part of a cash and shares deal valued at $382 million and finalizing the deal in April 2013. The move to aggressive acquisition strategies by the majors has been seen as an indication of both a lack of big deposits and reduced valuations of juniors. Following the Minefinders acquisition, Pan American’s CEO Geoff Burns said that there was a shortage of big silver deposits currently

being developed by major firms. Mitchell Krebs, CEO of Coeur, told Mining Leaders, “it used to be that it was hard to find a project that you could buy, build and operate at an attractive rate of return. You had to assume exploration potential or see a hockey stick in prices. Now, however, some things are penciling in to where it makes sense. Acquisitions are not the highest rate of return, compared to expanding operations or exploration, but there is now a place for M&A. It’s a

"I've spent a lot of time in other parts of the world as a geologist and I've never seen as much mineralization as I have in Mexico." buyers market for companies that are generating cash flow.” Unsurprisingly some of the most attractive undeveloped silver projects lie in Mexico. Three advanced-stage exploration projects stand out. Silver Bull Resources’ Sierra Mojada project in Coahuila state has an indicated resource of 162.9Moz silver and 2.41 billion pounds of zinc and lies near a major railroad. To the west in Chihuahua, Levon Resources' four

years of exploration at the Cordero project, has enabled them to build a resource estimate containing a massive 364Moz of indicated silver, plus nearly 1Moz of indicated gold and 6 billion pounds of zinc. However, as a low grade, bulk-tonnage porphyry deposit it remains highly sensitive to metal prices. Grade is not a problem at MAG Silver’s Juanicipio project, which operates as a joint venture with Fresnillo on a land package southwest of the Mexican giant’s flagship mine. The project has an indicated resource of 128Moz silver at grades of 702g/t. MAG Silver is also 100% owner of Cinco de Mayo, a major carbonate replacement deposit system hosting gold, lead and zinc. However, anti-mining groups in the region called for an eviction of the company and the establishment of a 100-year mining moratorium on the property, a decision that MAG is challenging in the courts. Despite being in Chihuahua state, a region with a long and proud mining history, the Cinco de Mayo case demonstrates that significant local political risk remains in Mexico. As the search for new deposits continues, explorers are increasingly moving into more remote areas of the country. Despite its long history of silver mining, Mexico remained largely unexplored by modern methods until the 1980s, in part due to property laws. The new wave of explorers are finding that the Spaniards didn’t take everything with them. “I’ve spent a lot of time in other parts of the world as a geologist and I’ve never seen as much mineralization as I have in Mexico,” says Tim Barry, President and CEO of Silver Bull, “And it’s just sitting at surface.” Almaden Minerals, a firm with several decades of Mexican exploration experience, has discovered and sold dozens of projects across the length and breadth of the country. Its current flagship project, Ixtaca, lies in a remote region of northern Puebla state. A number of other juniors have focused on the southern states of Oaxaca and Guerrero as targets for greenfield discoveries, but depressed share prices and reduced exploration budgets means that their treasures could take time to be revealed.

Mining Leaders

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Noche Buena (Fresnillo) Cruz de Mayo (Silvercrest) Dolores (Pan American Silver) Palmarejo (Coeur) Parral (Endeavour Silver) Alamo Dorado (Pan American Silver) Santa Barbara (Grupo México) Guanacevi (Endeavour Silver) Topia (Great Panther Resources) Cosalá District (Scorpio Mining) Fresnillo (Fresnillo) La Platosa (Excellon Resources) Avino (Avino Silver) Saucito (Fresnillo) La Colorada (Pan American Silver)

Silver Mines company focus

16. 17. 18. 19. 20.

9 10

La Parrilla (First Majestic Silver) San José (Arian Silver) San Martín (Goldcorp) El Cubo (Endeavour Silver) Natividad (Fortuna Silver)

MAP OF MAJOR SILVER MINES in Mexico

feature interview

SURFING SILVER WAVEs Pan American Silver has long operated silver mines in Mexico. Last year the company experienced record revenues, but the results are due to more than just high metals prices. The low-cost silver producer acquired the Dolores mine in Mexico while optimizing its existing operations. Chris Warwick, Pan American's country manager for Mexico, discusses his plans to grow operations, while detailing his largest concerns: water and politics.

“M

exico was always going to be an adventure for me,” says Chris Warwick, Pan American Silver’s Country Manager for Mexico, “but it’s been seven years since I arrived here and I cannot see myself leaving any time soon.” During his tenure, Warwick has built up the firm's Mexico operations, making it the largest contributor to the company’s global production. Pan American Silver is now the world’s second largest primary silver producer. In 2012, the firm's global production totaled 25.1Moz of silver, of which 12.7Moz was produced in Mexico from the existing La Colorada, Alamo Dorado and the newly acquired Dolores.

After reviewing Pan American’s record 2012 performance, it’s surprising to note that only seven years ago the company faced an uncertain future in Mexico. Its oldest mine in the country—La Colorada—was bordering on closure as a result of declining reserves. “Everything was dwindling: the production, the mine life and of course this knocked on to the team’s motivation,” says Warwick. “I believed that there was further potential to build up and recover the operation by putting together an effective, motivated, team to look for this upside. Luckily, with time we kept getting hits in our internal exploration program, which gave us the motivation to keep moving forward.”

The initial results turned some heads and from there, the company was able to implement an aggressive development and exploration program, which has led to the success of the operation today. “It still continues to grow too; our success has led to more success and I’m very proud of what the team has achieved in the last five years.” The exploration program culminated last year when Pan American raised the proven and probable reserves by 47% to 65Moz. At over 400g/t Ag, La Colorada is the company’s highest grade mine; and the 32,000 meters of drilling planned for 2013 will map out the three veins extending to depth to the “monster mine below.” A new PEA is scheduled for

Chris Warwick

the second half of 2013, and though the numbers aren’t final, Warwick is confident that the mine life will be greater than 30 years. Having proved his skills in extending mine life via exploration, Warwick was given the same mission for Alamo Dorado, Pan American’s first open-pit mine. His approach, this time, was to redesign the mine plan rather than stepup exploration. When he took over, the mine was producing about 4.4Moz a year and increased yearly until it plateaued in 2011 at 5.3Moz. “We tried to squeeze the last drops out of the mine in 2012 with a budget of $5.4 million, but we didn’t quite get there,” he explains. In the face of high metals prices, Warwick made the deliberate decision to extend the life of the mine by focusing on lower grades. Mining the extra 500,000 ounces a year from the high-grade section was a net negative and created a lot of waste. “It’s a very deliberate policy; it’s not a question of the mine running out of resources, but we dropped down to extend production because I don’t think silver prices are going down significantly anytime soon.” Today, Alamo Dorado has 19.1Moz Ag of proven and probable reserves, leaving about 4.5 years of mine life. Besides brownfield expansion, Pan American is always looking to grow by acquisitions. In April 2012, the firm pulled the trigger and acquired the Dolores mine from the Minefinders Corporation in a $1.5 billion deal, immediately adding 77.1Moz Ag and 1.5Moz Au of proven and probable reserves. Minefinders had operated the mine for three years beforehand but now Warwick is focused on “bringing the mine up to speed,” so it operates within Pan American’s strategy. “Everyone mines a different way, but we need to stick to our philosophy,” explains Warwick. “We’re a low-cost silver producer.” In 2013 Dolores will see a $34 million makeover aimed at improving productivity, primarily by expanding an existing heap leach pad and building a new one. As the integration continues, production should nearly double to 4.8Moz-5.0Moz silver at a cost of between

DOLORES MINE ALAMO DORADO

LA COLORADA

MEXICO d.f

$2.25-$3.50 per ounce, the lowest of all the company’s mines. The acquisition of Dolores added a sizeable amount of gold reserves, but the company’s strategy is to focus on silver. Pan American confirmed this strategy early in February by divesting the three gold properties in its portfolio to the former management of Minefinders, now running Esperanza Resources. Dolores remains the focus for 2013, but Warwick also needs to deal with a number of issues. “My biggest environmental concern, by far, is water— it can be a blessing or a curse at all of our operations,” he says, as the summer dry season begins. At La Colorada, there is too much water, while at the other two mines, significant investment was required in order to guarantee a constant supply of water. “There’s always someone downstream who has requirements besides ourselves,” explains Warwick when describing the local communities. “We have very good relations with all three of the surrounding communities within the vicinity of our project because we need the mines to operate.” The company has made significant infrastructure investment while also creating scholarships and educational programs to benefit its neighbors. In spite of the large investments in communities, some politicians would say that sums

like this are not enough, and demand royalties to directly benefit the local communities. It looks likely that 2013 is the year when the long-proposed mineral royalty is finally passed into Mexican mining law. The mining community expects the preliminary figure to come to 5% of production, yet eyes are on Congress to stamp out the final details during the second half of 2013. “It will definitely impact us in terms of cash as it’s a sizeable amount,” he says. “Yet I don’t think Mexico will go down the extreme paths of other countries like Bolivia or Argentina.” Having spent seven years building up Mexico operations, Warwick believes the country will provide a bright future for Pan American. Last year, Mexico proudly boasted the title of world’s top silver producer; much of this is due to the 12.7Moz produced by Pan American. This year is poised to be even better, despite the shifting political climate; 2013 guidance points to 13.15Moz of silver, a number that will surely grow in the long run. Warwick explains: “We are here to do business in Mexico and whichever other countries that are open to silver mining. Our strategy is simple: we’re silver miners; it’s our forte, what we do best and what we will continue to do for some time yet to come.” Mining Leaders

q&a

Octavio Alvídrez CEO Fresnillo Plc

Building districts

Octavio Alvídrez became CEO of Fresnillo in 2012 after a career in various leadership roles within Grupo BAL’s mining divisions: Industrias Peñoles and Fresnillo plc. After a spin-off from Peñoles in 2008, Fresnillo is at the halfway point of an ambitious plan to make the world’s biggest primary silver producer even bigger. The company's business model is focused on organic growth by building new mining districts. Alvídrez explains how they plan to build two new districts by 2018. In 2008, Grupo BAL’s board made the decision to split Peñoles compared to 41.9Moz the previous year. That said, the real and Fresnillo so investors could focus purely on precious growth will take place in the next few years, as two new projects metals. How has investor sentiment shifted since then? come online—bringing us up to 65Moz. San Julián will give us One of the main elements was to achieve the proper valuation of between 9-10Moz silver per year and the expansion of Saucito, each business entity. Peñoles is a very diversified conglomerate, completed by 2015, will provide a further 9Moz silver per year. spanning mining, smelting and chemicals. By separating the Right now we’re exposed to the fall in prices, but we’ve partially assets of Peñoles, then listing Fresnillo in London we wanted compensated by cutting costs and optimizing other investments. to properly value Fresnillo. At listing we created a 10-year plan We’ve also been able to renegotiate payments with some of our to double precious metals production; in 2018 we expect to suppliers. Despite this, none of our projects have been delayed. produce 65Moz silver and 500,000 ounces of gold. In my opinion, investor sentiment has changed in the five years since we listed in London. Back in 2005-2006 there was a downturn in precious Besides financial results, “human” results such as safety and metals, but growth in Asia and Brazil created a strong demand sustainability also matter to investors. How will Fresnillo’s for base metals. The emerging economies were responsible for Health, Safety, Environment and Community Relations the increase in base metal prices until the financial crisis. When (HSECR) system contribute to development in Mexico? the economy collapsed in 2008, all eyes were on gold, as a refuge Sustainability is very important in mining, and Fresnillo adheres against the global crisis. Demand for precious metals rose greatly not only to national but to international standards. The HSECR during this time, but now it looks like we’re entering a new phase plan, which we implemented in 2012, has five elements that of lower priced precious metals, even though fundamentals contribute to the company’s sustainability: zero new professional point to higher prices. illnesses, zero fatal accidents, zero significant environmental issues, zero conflicts with communities where we are present, Why did you list in London over New York or Toronto? and finally, zero labor conflicts with our workers. We are We strongly considered the other markets, but chose London investing a great deal of work in these five areas because they are because it’s a very important financial center for mining, with the basis of sustainability. Globally, the mining industry has seen many large miners from around the world listed. London also fewer accidents yet the number of fatalities has stayed the same. has plenty of analysts focused on mining. There was a time when mining companies were not listing in the United States—one In five years Fresnillo has doubled its number of producing factor that deterred us. The other factor was the tax regime. mines. What is Fresnillo’s strategy to both optimize existing Fresnillo is a British company that only pays taxes in Mexico. If mines and develop new districts? we had chosen NYSE, we’d have to incorporate as an American In 2008 we had three mines in operation: Fresnillo, the largest company and pay taxes in both the United States and Mexico. silver mine in the world; Ciénega, an underground gold mine; In 2012 revenue was $2.15 billion, versus $2.19 billion in 2011. and La Herradura, an open-pit mine in Sonora. Five years later How should we interpret these numbers given the higher we have six operations: Soledad-Dipolos, another pit near La Herradura; Saucito, in the Fresnillo district; and finally Noche reserves and increased gold production in 2012? Buena plus a satellite deposit, San Ramon, near Ciénega. The Gold production rose to 473,000 ounces from 448,900 ounces model centers on creating synergies in our districts. Each ounce in 2012, while our silver production stayed flat at 41Moz we find has more value than in any other area because we have

Octavio Alvídrez

The Saucito mine has been in operation since 2011, but the second half of 2013 will see construction begin on the mine's expansion

the infrastructure, workers, and experience of the district. Yet The new mining law heads to the senate in September. With to grow to the level we want, we need new projects, so we must your expertise in the mining sector how would you design the royalty? explore new areas. The government’s first strategy should be promoting investment. Mexico’s growth is in part due to mining investment and I believe they need to consider the sensitivity of local and foreign investment to taxes. The royalty or mining right severely impacts the viability and longevity of many mining operations in the country. I think they need to reconsider the tax and these kinds of charges to make sure investment continues. Long-term returns in mining are not gigantic, but typically between 5-8%. Given that mining is not so profitable, they need a closer look at the mining law. A reduction in the You’ve earmarked $208 million for exploration in 2013. What percentage rate would be good. Mexico already pays taxes role do acquisitions play within the strategy? comparable to other mining countries. But the country lacks About 95 percent of Fresnillo’s growth is organic. We have strict incentives that other countries have. They need to consider the guidelines and criteria to evaluate prospective acquisitions and entire package: both the tax and incentives. projects. All are aimed at optimizing the costs of our operations, The gold:silver ratio is around 60. What do you see and it’s paid off because we’re leaders in this field. When we find happening in the next two years? a potential project, the operational aspects are top priority. Often, when we find an acquisition, we go back to the drawing In the long term, we’ve seen the ratio between 50 and board and implement our own exploration program. The 55, but now it’s around 60. Silver has a different demand sector has grown rapidly in recent years, and we're only now base compared to gold, which is essentially only an seeing a lot of the problems unravel as majors write-off large investment metal. On the other hand, silver is an important acquisitions. This won’t happen to Fresnillo, because we keep component for industrial and technological applications. growth in-house via our own exploration and developing our The first shock experienced by the silver sector was the own districts. In general Fresnillo’s exploration has had good shift to digital cameras, when 50% of demand came from results. Five years ago we had 1.1Boz of silver resources and photographic industries. Since then, new industrial uses now we have 2Boz—we’ve doubled our silver resource. Gold picked up the slack in demand and the price of silver has has grown too; in 2008 we had 9Moz of gold resources and now not been affected. In the coming years there will be more we have 27Moz of gold. Greater resources give us the platform demand than supply for physical silver, as more silverintensive technologies are developed. to continue growing in the future. We have 2.2 million hectares of exploration concessions. Fresnillo may be a young firm but we come from a company with 125 years of experience. Fresnillo is one of the only districts that continues to produce silver going all the way back to colonial times. The first reports of silver production here date back to 1550. Our Fresnillo mine is the oldest silver mine in production in the world. This history and the knowledge of our geologists allows us to have the best concessions in the most prospected regions of Mexico. It’s how we got San Julián and other projects.

Mining Leaders

q&a

Silver

John Smith President & CEO Silver Standard Resources

Bullets

John Smith oversaw nine coal mines and a port in Queensland for the BHP Billiton-Mitsubishi Alliance before shifting to the silver industry. In 2010, he became the CEO and President of Silver Standard Resources, a company with 479 million ounces of silver in total reserves, operating in six countries. The company has achieved some significant milestones under Smith’s management and is now focused on advancing its large scale Pitarrilla project in Mexico. You gained extensive experience in industrial metals like coal, For Silver Standard in general, how significant was it to start iron ore and manganese before coming to Silver Standard. What production at the Pirquitas mine in Argentina? Did that reflect on your Mexico operations at all? challenges came with moving into the silver market? Silver is quite a different market. This took a while for me to The Pirquitas mine was a difficult startup. It stands at an altitude of comprehend, because when working in other commodities you’re 4,500 meters, in remote and difficult country. Starting up a mine always working on your supply and demand curves. With Silver that produces 6,000 tons per day (8Moz per annum) is a significant Standard, I was coming into a relatively young company primarily in project in the silver space. Getting a big mine up and operating in exploration and just starting to move into production. So, from a supply those climates and circumstances proved quite challenging, but we and demand perspective, this company was much different. Silver has eventually completed it in late 2011. Since then, we’ve continued to two big elements that are constantly at odds: it’s an investment vehicle deliver operating results to the market. I think that after going through and a proxy for currency. So in today’s world that’s how silver prices that struggle, we’ve come a long way: what doesn’t kill you, makes you are set—by investment appetite. When an economy is full-scale and stronger. As a company, we are now very capable of operating a largerobust, silver behaves like an industrial metal, used in the production scale mine. of technologies and microchips, solar panels and so on. Today, it’s in Our Pitarrilla mine in Mexico will be even larger, close to 16,000 money mode, and tomorrow it could turn into an industrial metal. It’s tons per day. It’s not remote, however, and it’s not as difficult to bring very difficult to get a handle on silver; you almost have to model the online. Access to and from the site is much easier, and the terrain— whole world economy to get a sense of it, and you can’t do that. What’s likewise. From the point of view of certain elements at Pitarrilla, the driving it now is the monetary stimulus that’s being applied across all project could not go a lot smoother. major nations in attempts to fire up stagnant economies. How will the mine be approached from an operational standpoint? In light of that stimulus, where do you see the price of silver in It will be a large open-pit mine, producing from oxide and sulphide coming years? If you go back to basics, governments have three levers they can zones. The oxide ore, located near the surface, will be processed by pull in the current economic situation. The first two involve raising leaching, while the sulfide ore, found deeper in the deposit, will be taxes and reducing entitlements and social programs. The obvious processed by flotation. Right now we are focused on enhancing the problem with those is they can be politically divisive and unpopular. metallurgical work to best position us to extract the highest recovery So you see many governments are pulling the third lever—printing percentages possible. We’re looking at 70% to 80% recoveries in the money—which, is frankly, one of the only policies that the public sulfide zone. The capital expenditures for the project are expected to be will swallow in this political climate. Like all these things, it will approximately $741 million. Everybody is capital-conservative right take a while until somebody steps up to offer a hard solution. So now, but from a supply point of view that’s helped us with reducing far we haven’t seen that. This all leads toward debasing the value of long lead time equipment. Throughout 2013, we’ll be looking at a a country’s currency, so silver becomes a safe place for people to go. range of potential funding models. Play that out over a number of years, until we really start to see the European Union and the United States implement hard solutions, and silver will remain strong. And it’s different for gold, as people often forget. Gold doesn’t have the same industrial value as silver when consumers turn toward hard goods.

We also have a continuous engagement with the communities nearby the project. It’s important for us to show them that we're socially responsible people and committed to helping them move forward as we develop this mine. They are the most important people in terms of making this project work.

project focus

Scorpio Mining Corp Ticker

TSX: SPM

Location

Cosalá, Sinaloa

Resource

Development 2013

Proven and Probable Reserves: 2.47Moz Ag; 29.5Mlbs Zn; 14.9Mlbs Pb; 4.4Moz Cu Development of satellite deposits and a plant expansion decision

Nuestra Señora Pierre Lacombe was appointed CEO of Scorpio Mining at the end of April, just 10 days after announcing first quarter profits of $1.3 million. Scorpio’s sole producing asset is the Nuestra Señora mine, located in the Cosalá district of Sinaloa, which has a 12-month mine life based on the recent estimate. “However, the consultants who derived this number readily admit we should be able to convert a good bit of the resource into mineable ore, providing a longer mine life than implied,” stated Lacombe. Scorpio is focused on developing two advanced-stage deposits near its Nuestra Señora plant, to provide feed to this plant in the future. The plant was recently upgraded from a nameplate capacity of 1,500 tons per day to a throughput of 1,700 tons per day. However, management is signaling that it could be upgraded to 2,750 tons per day by 2015, if the satellite deposit of San Rafael comes into play, as per the development schedule outlined in the PEA, released on May 22.

The PEA outlines a base case scenario of151% ROI on $85.3 million in capital and a NPV(5%) of $166.7 million. We will look to build from this towards an improved NPV outlook Pierre Lacombe President & CEO Scorpio Mining

400-500 tons per day of copper-silver bearing material from the past-producing La Verde Mine on Scorpio’s concessions. And management is fast-tracking El Cajón, a silver-gold skarn deposit 14 kilometers north of the existing plant. A reserve conversion is planned for later this year, but for the moment El Cajón hosts an indicated resource of 12.4Moz Ag and 27.7Mlbs Cu, to be mined underground from early 2014 at up to 1500 tons per day. “El Cajón, by itself, wouldn’t justify the $12 million to finalize the plant’s

expansion,” explains Lacombe. The “trigger” in his words, would be when San Rafael enters production in early 2015, as outlined in the PEA. The company has environmental permits for underground mining at the skarn, but Lacombe prefers an open-pit plan to lower costs. The San Rafael deposit is an ace up the sleeve for Scorpio. Analysts are predicting a “scare” in the zinc market beginning 2015, due to the closure of large zinc mines. A July 2012 resource estimate calculated 648Mlbs of contained zinc at San Rafael and according to Lacombe, “it sufficiently excited some players in the zinc market to generate unsolicited calls.” San Rafael could justify its own standalone 3,000-4,000 tons per day plant, which would in turn negate the need for expanding the Nuestra Señora plant and create larger cashflows in the short run. Luckily, Lacombe sees potential for strong market interest for joint ventures and could develop the project with third-party capital.

The company's PEA outlines a base case scenario providing a 151% ROI on $85.3 million in capital, $50 million of which is required in the first two years, and a NPV(5%) of $166.7 million. Even so, Lacombe admits that as the year progresses, “it may be harder to maintain the 1,700 tons per day throughput with only Nuestra Señora ore.” But to counter the potential slack, there are plans to obtain Mining Leaders

Project focus Cordero Operator Ticker

Levon Resources TSX:LVN, USOTC:LVNVF, FSE:L09

Location

Chihuahua

Resource

Development 2013

364Moz In. & 91.2Moz If. Ag; 945,000oz In. & 152,000oz If. Au, 6.1Blbs In. & 0.7Blbs If. Zn; 3.3Blbs In. & 1.2Blbs If. Pb Engineering & metallurgical studies, further drilling from Sept.

Cordero

“In porphyries you’re not looking for the needle. You’re looking for the haystack,” says Ron Tremblay, Levon Resources’ president and CEO. Four years after acquiring the Cordero project in Chihuahua state, Levon has discovered a new, emerging porphyry district in Mexico.

Our philosophy is to pursue only projects with large deposit potential. The work we’ve done supports our hypothesis that Cordero could be the seventhlargest silver deposit in the world.

to take to the market and finance the rest of the program. Phase one drilling resulted in three discovery holes, the best of which was #C09-05, 300 meters from the discovery outcrop, which returned values of 80.6g/t Ag, 0.61g/t Au, 1.41% Zn, and 2.27% Pb over 152 meters in its best intercept.

In 2009, Levon purchased Cordero from a junior that had completed some initial surface exploration and consolidated some of the property. “We realized on the second day of the Cordero property exam that we could be looking at a diatreme breccia discovery outcrop that had previously gone unrecognized or unsampled,” explains Tremblay. Vice-president of exploration, Vic Chevillon, realized the outcrops “were museum-quality exposures,” the same

Ron Tremblay President & CEO Levon Resources

Tremblay published the drill results and the market took off. They raised $3.5 million, which financed the next phase of grid and exploration drilling. After another series of discovery holes were drilled, they confirmed “bona fide” porphyry mineralization. “It gave us the confidence to expand exploration into a third phase of drilling. We went back to the market for funding to expand the resource grid and pursue outlying exploration drilling,” says Tremblay.

rock-type that hosts Goldcorp’s flagship Peñasquito mine. After returning very good trench samples, Chevillon and Tremblay made private placements to come up with the initial $250,000 drilling budget, enabling them to drill holes

After 113,000 meters of drilling (250 holes) through four phases, exploration has mainly focused on the Pozo de Plata diatreme discovery area, eight outlying targets in two porphyry belts, and the adjacent La Perla mineralized volcanic complex. “The early holes encountered mineralization for followup exploration in the future, but the main focus is to delimit the resource, and drill higher-grade material within the planned starter-pit to improve the economics of the project,” says Tremblay. The existing PEA, which

chihuahua

hidalgo del parral

cordero

is based on 30% of the original resource, highlights a 14.8% IRR and a NPV (5% discount) of just over $400 million. As studies and drilling advance, the PEA will likely be favorably readjusted in the future once the rest of the deposit is incorporated. During 2013, the company has focused on second-round metallurgical studies to optimize the mill design for open-pit early production, purchasing the underlying option claims and finishing the acquisition of a single, 16-hectare claim to consolidate 100% ownership of the district. In September, a fifth phase of drilling will begin in order to expand the resource and improve the grade and geometry of the starter pit. “We believe that the 40,000 tons per day mill will be expanded to at least 80,000 tons per day or larger,” Tremblay explains. The proximity to the nearby town of Hidalgo del Parral offers both a sufficiently skilled mining labor force and an adequate power source to operate a large mine. “From the beginning, Levon has aimed to be a good neighbor in the community,” explains Tremblay. “One of our goals has been to discover a deposit that could lead to a large-scale, long-lived mine near Parral.” To date, local, state, and federal government agencies and officials have provided support, and are enthusiastic about the efforts and vision in an area with ideal mining infrastructure and community support. As Luis Alba, Chihuahua Minister of Mines, said on his tour of the property, “What you are doing is important for the future of Parral, Chihuahua, and Mexico.” Mining Leaders

analysis

a question of integrity Prior to his current role, Nick Panes was head of corporate investigations and business intelligence teams for Control Risk’s Mexico City and Bogotá offices. Since joining Control Risks in January 2001, Panes has focused on corporate investigations and political and security risk analysis.

lthough security-related risks often dominate the public consciousness, integrity risks remain a critical issue for companies operating in Mexico. Concerns about corruption hardly represent a new phenomenon, but the issues have become more visible recently, driven by widespread local and international media coverage of several highprofile cases. Moves by the Mexican government to strengthen domestic legislation, combined with the long arm of extra-territorial laws, place added regulatory and operational pressures on companies working in Mexico.

Information Act, among others. However, both former President Felipe Calderón and current President Enrique Peña Nieto have sought to bolster the anti-corruption legal framework. In June 2012, the Senate approved the Federal Anti-Corruption Law on Public Procurement (LFACP), which passed through the Chamber of Deputies in March 2012. The law is federal in nature (although broad in its interpretation) and covers the granting of federal permits and concessions, which will be particularly relevant to key industries, including the mining sector. The new law shares several characteristics with the US Foreign Corrupt Practices Act (FCPA). Under the LFACP it is illegal to give or offer any type of bribe or inducement to a public official in order to obtain any undue commercial advantage or benefit in the area of public procurement. Significantly, the law will

Reform initiatives: Mexico already has an anti-corruption apparatus, which includes a number of laws, such as the 2002 Federal Law of Administrative Responsibilities of Public Servants and the 2002 Federal Transparency and Access to Government Public

8.5

Interestingly, in January 2013, Peña Nieto, while proposing the creation of an independent National Anti-corruption Commission, also moved to dissolve the Secretariat of Public Administration; which had been responsible for the implementation and enforcement of several of the anti-corruption laws detailed above. This raises the question as to whether the LFACP and the other proposed anti-corruption entities will enhance existing structures or create further institutional complications. It is hard to contest the need for greater accountability and transparency within the public procurement process and

Bribe Payers Index

Corruption Perception Index

assist Mexico’s compliance with several international anti-corruption conventions, such as the Inter-American Convention Against Corruption (ICAC) and the OECD´s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

8.4 8.5

8.5

7.7

7.6 7.3

6 4.3

7.1

4.3

3.5

3.4

6.1 3.2

2.8

lia

stra

uth Sofrica A

zil

Bra

ntin

e Arg

xic

nes

o Ind

sia

Rus

lia

stra

zil

Bra

a uth ina esi Sofrica ent on A Ind Arg

xic

sia

Rus

corruption VIOLENCE IN MEXICO Mexico's congress has taken many steps to strengthen anti-corruption legislation in the country

the integrity climate may be much worse, or considerably better. Similarly, industry practices vary widely according to sector and location. Integrity risks are greatest in sectors such as the extractive industry —with high levels of state involvement. It is also crucial to select the right partners. International enforcement trends make clear that third-party risk is one of the greatest integrity hazards facing international companies. This applies to potential joint venture partners and—at an everyday level—to service providers and subcontractors. Additionally, firms should exercise clear internal leadership. A strong anti-corruption message, expressed in the right “tone-from-the-top”, is essential and in tune with the times.

Source: CNN

the creation of the LFACP is welcome. Moreover, the long-term process of incremental change should be viewed positively. Implementation: The application of these new and existing laws remains critical, however. The problem is less to do with the letter of the law and more to do with its implementation and enforcement. Large-scale corruption scandals still appear in the press and local residents routinely report of lowlevel bureaucratic harassment. In April 2012, The New York Times reported that bribery and other forms of corruption cost the Mexican economy over $114 billion per year, 10% of national GDP. Poor enforcement partly reflects the clientelist and patronage politics that have historically characterized political processes at the federal, state and municipal levels. During the 2000-2006 presidency of Vicente Fox, the ruling National Action Party (PAN) pushed through several corruption-focused reforms, seemingly offering refreshing governance changes after decades of rule by the Institutional Revolutionary Party (PRI). However, numerous allegations of corruption and cronyism appeared after Fox was replaced by Calderón. The critical question now is how far Peña Nieto will be prepared to effect pre-electoral pledges of substantive governance reforms, instead

of token gestures. Anti-corruption rhetoric has long been a staple of political debate, only for the same patterns to be repeated when incoming governments emulate the patronage politics of their predecessors. Zooming in: Although large-scale corruption scandals take centre stage, some of the most difficult challenges our clients face are granular: the unpredictability of threats to business continuity, the uncertain and opaque links among political players and organized crime, and day-to-day operational bribes to keep businesses running, particularly around permits, licences and operating regulations. Achieving safe and sustained business success, while maintaining full compliance with a complex regulatory web, requires significant time and effort, as well as creative strategies to ensure adherence to legal norms and a company’s ethical and compliance policies. Investor strategies: Corruption will remain an issue at an operational level and if investors are to be successful they need to combine long-term strategic vision with immediate tactical considerations. It is important to first assess specific risks in particular regions and sectors. National-level assessments are only the starting point in a country of Mexico’s diversity. At the state or municipal level,

Do not underestimate the importance of planning ahead for difficult transactions. These typically include anything surrounding license applications, and take the best advice to make sure that you have covered all the details in advance. Investors should also be prepared to take their time. People in a hurry are more vulnerable to corrupt officials looking for extra inducements for prompt action. Like other emerging markets, investors should be prepared to see Mexico as a long-term investment prospect. Outlook: Tighter enforcement of extraterritorial anti-corruption laws and new domestic legislation bodes well for the future; however the application of anti-corruption laws is likely to remain highly inconsistent, presenting the greatest challenge for businesses. Companies cannot afford to ignore tighter legal enforcement, especially if based in the US, Canada or the UK, while still needing to compete against unscrupulous rivals, many of whom may be less concerned with abolishing corrupt practices.

Control Risks is an independent, global risk consultancy specialising in helping organisations manage political, integrity and security risks in complex and hostile environments. www.controlrisks.com

Mining Leaders

project focus

Arian Silver Ticker

TSX.V: AGQ, AIM: AGQ, FSE: I3A

Location

Zacatecas

In. 30.51 Moz Ag, 67.02 Mlb Pb, 149.91 Mlb Zn If 86.65 Moz Ag, 205.25Mlb Pb, 410.50Mlb Zn Currently in trial production; Acquisition of own custom mill to replace interim toll Development 2013 milling facility with full capacity production targeted at 1,500 tons per day.

Resource

San José

“It’s a geologically simple silver-lead-zinc epithermal vein-type deposit—but it is also very large, with significant growth potential,” says Arian Silver’s President and CEO, Jim Williams, of the company’s key San José project. Since founding Arian Silver in 2005, Williams, who holds a master’s from Imperial College London’s Royal School of Mines, has managed ongoing systematic exploration from 2006 and built up a significant resource at the 6,300-hectare site approximately 50 kilometers east of Zacatecas City. Production, albeit on a trial mining basis, began at San José in late 2010. Currently, Arian has two priorities: building its own custom mill at the project, and further increasing the resource. Arian has purchased 30 hectares of brownfield land to house the mill and its tailings pond. San José's resource estimate has grown several times since drilling began in 2006 —culminating in April 2012 when the indicated and inferred resource estimate

A custom company-owned mill will enable Arian to extract full value from this project, and Arian has two priorities: building its own custom mill, and further increasing its mineral resource estimate.

Arian is also busy sourcing, and is looking towards constructing its own mill at San José. When trial production started in the fourth quarter of 2010, the company trucked its ore to Zacatecas for processing. Williams and his team in Mexico have since identified an existing custom plant and are currently negotiating to purchase and transport it to San José for reassembly. The plant upgrade will increase daily capacity from 500 tons per day to 1,500 tons per day, within about three years— strengthening the company’s financials and significantly reducing not only cash costs but also all-in sustaining costs.

Jim Williams Co-founder, President & CEO Arian Silver

rose to nearly 120Moz silver, more than 250Mlb lead, and more than 500Mlb zinc. Like many projects in Mexico, San José is a historic mine. Between 1973 and 1999, the extensive vein system was mined down to approximately 375 meters. “We’ve put together the resource of nearly 120Moz by modeling down to 220 meters,” says Williams. “Given my experience working in Mexico and my familiarity with its geology, I’d say that ultimately this could be a 200Moz

Source: Arian Silver presentation

San José Mineral Resource Estimate

March 2008 Phase 1

August 2008 Phase 2

July 2011 Phase 3

April 2012 Phase 4

plus silver deposit, with even more lead and zinc.” Nearly 40,000 meters have now been drilled all across the extensive property over four phases. The company plans another 10,000 meters of step-out and infill drilling, with hopes of increasing the resource estimate even further.

While Arian may be on the radar for potential acquisition by a mid-tier or major silver mining company, Williams is not convinced the current market valuations adequately capture the inherent value of the San José project. “Arian’s shareholders deserve better,” Williams affirms. “A custom companyowned mill will enable Arian to extract full value from this project, and Arian has two priorities: building its own custom mill, and further increasing its mineral resource estimate.

company focus

SilverCrest Mines TSXV: SVL, NYSE MKT: SLVC Santa Elena, La Hoya, Cruz de Mayo Second phase expansion of Santa Elena. Exploration of La Hoya.

Ticker Projects Development 2013

SILVERCREST

“Not all ounces are created equal.” This mantra features on SilverCrest Mines’ company presentation and is a firm belief of the company’s President, Scott Drever. The Vancouver-based producer has put this principle into practice, bringing to production its Santa Elena gold and silver mine in Sonora with an investment of $20 million and a profit margin of around 45%. “There has been a clear trend whereby the markets only look at ounces produced and in many cases have ignored profitability,” says Drever. “Some firms have huge production but tight margins. Our Santa Elena project is smaller but we have far more room to move if silver prices drop.” With approximately $40 million in cash, an expansion project underway at Santa Elena, and a potentially much larger project being drilled out at La Joya, SilverCrest will likely graduate to intermediate producer status in the next two years. In December 2005, SilverCrest acquired Santa Elena, but built the project in the aftermath of the 2008 financial crisis. Despite tough conditions, the firm raised capital from Macquarie Bank and Sandstorm Gold, making SilverCrest one of the gold-streaming company’s first projects. The otherwise tricky timing did provide some benefits, however. “We took advantage of the market downturn to secure good equipment deals and shave capital costs,” explains Drever.

We are set to dramatically increase production in the next two years and with the addition of La Joya production, within our steady growth strategy, we could be a senior producer. Scott Drever President SilverCrest Mines

“We delivered the project on time for under $20 million, when some outsiders had estimated it as a $35 million project.” After its first pour in late 2010, the mine produced 33,000 ounces of gold and 579,609 ounces of silver in 2012, providing a yearly cash flow of $40 million. Santa Elena was conceived from the start as a two-stage project, suggesting that the first-stage open-pit mine be completed in late 2014 to focus on and produce the mine’s underground reserves.

SilverCrest is building a conventional mill to process the below-surface gold and silver at higher recovery rates, with commercial production expected in early 2014. The underground portion is expected to have a mine life of 8 to 10 years. Ore from a satellite project, Cruz de Mayo, may also be fed to the mine, metal prices permitting. Developments at Santa Elena could make SilverCrest an intermediate producer, but the real company-maker, in Drever’s view, lies south in the Western Cordillera, 75 kilometers from the city of Durango. There, the company is exploring its La Joya silver and gold project. The firm has already identified a potential starter pit with 27.9Mt containing over 100Moz of silver equivalent, giving the project an estimated mine life of 10 years. However, this pit forms only a small portion of the total deposit. A PEA should be released before the end of 2013 and Drever is eyeing first production in late 2016–17. Revenue & Cash Flow Growth

Revenue Cash Flow

20 15 10 5

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Mining Leaders

Q1 2013

feature interview

cri du coeur Despite higher metal prices, mining stocks have not performed in lock-step over the long term. For Mitchell Krebs, president and CEO of Coeur Mining, the large structural changes in mining require companies to innovate. Krebs has ambitious plans to buck the trend and make Coeur Mining stand out for shareholders. Mexico hosts the company’s premier mine and a recent acquisition secures the country within Coeur’s future strategy.

ourscore and five years ago, Coeur d’Alene Mines Corp was founded in the Bitterroot Mountains in northern Idaho. Coeur has since grown to become the largest US-based primary silver producer, with mines in Alaska, Bolivia and Nevada, as well as an important presence in Mexico, where the company extracts about half of its annual production from its flagship Palmarejo silver mine in Chihuahua. Now, under the leadership of president and CEO Mitchell Krebs, the company is launching a new strategy to smooth out the company’s production figures and offer shareholders consistently strong returns. Mexico is key in the

opening gambit of this strategy: the firm recently acquired Orko Silver and its flagship La Preciosa project in Durango, one of the world's largest undeveloped silver deposits. Krebs ultimately aims to remind other mining companies, by example, of their primary responsibility to protect and increase value for shareholders. Krebs admits that Palmarejo hit a “rough stretch”, during 2012 following a problem with the mine plan. The 122– square kilometer property is mined in five different clavos or sections; three are underground and the others are mined from the surface. In 2012, production

came to 8.2Moz silver and 106,038 ounces of gold. Yet Krebs is not fully satisfied with Palmarejo; between 2011 and 2012, silver production there fell by more than a million ounces. “We’re still in the growth phase and we’ve been very focused on the short term: first on building the mine, starting it up, and smoothing it out,” says Krebs. Last September, Coeur shook up the local management team at Palmarejo in order to inject some fresh energy into the operation. Krebs predicts 2013 silver production will reach between 7.7Moz and 8.3Moz. The La Preciosa acquisition was intended to reduce Coeur’s dependence

Mitchell Krebs

on Palmarejo. “It’s important to have a diversified stable of assets so when one stumbles, another of our mines will have a good quarter,” says Krebs. “We’ d had our eye on La Preciosa for several years and decided to take a closer look in 2012.” Late that year, while Coeur was valuing the deal, First Majestic Silver pounced and made an all-share offer to acquire Orko Silver on December 16. Following the announcement, First Majestic shares saw some “fairly significant erosion,” lowering the overall value of the offer. Krebs continued to watch the downward movement in First Majestic shares into the New Year until he began to see new value in the deal. Coeur made a counteroffer on February 13, 2013. “We added $100 million in cash,” says Krebs. Coeur valued Orko Silver at $384 million, a premium of about 25% when considering the combined cash and share offer. “This allowed our offer to hang in there through a choppy market. We ended up paying a sum similar to what we had calculated earlier in 2012, a level where we can see La Preciosa adding significant value to our company.” With the deal formally closing at the end of April, Coeur is now focused on developing La Preciosa quickly. The PEA indicates an initial estimated mine life of 17 years recovering an estimated 134.5 million ounces of silver and generating a 17% after-tax internal rate of return (IRR) using price assumptions of $25 per silver ounce and $1,500 per gold ounce. The acquisition forms a small part of Krebs’ overarching plan for Coeur to shake up the current investment paradigm in the mining sector. “I believe that the mining industry has shown a historical propensity to destroy shareholder value,” explains Krebs. “This company goes back to the 1920s and two years ago we decided that the status quo in the industry was not acceptable.” Krebs joined Coeur in 1995 after spending several years in the investment banking industry. He has held various positions with Coeur, including Senior Vice President of Corporate Development and in 2008 he was named Chief Financial Officer, a position he held until being appointed

Coeur Mining processes half of its annual production at the Palmarejo silver project in Chihuahua

President and CEO in July 2011. He now runs the company’s finances meticulously, bringing to the world’s ninth-largest silver producer an outlook more common to investment banks than mining companies. “Since I started in this business, there has been a great deal of change in mining due to macro factors,” says Krebs. “Before 2006, the mining industry had a free pass because investors had only one game in town: the producing companies.” However, the introduction of ETFs is one of the macro factors that has hit the industry and held management responsible. As metal prices rose, mining stocks diverged and valuations declined as investors chose the simplicity of an ETF over the far riskier mining equities. “The ETF is largely responsible for this disconnect, and now mining companies are being forced to compete on real metrics like any other business. This is what we should be doing, and this is what we love to do,” says Krebs. “There are going to be companies that understand the disparity and adapt, and then there will be those that don’t.” Krebs has been quick to show shareholders Coeur’s new vision in navigating the mining market. Gold has contributed more cash flow in recent years due to new mines being

commissioned and the mining of higher gold grades at Palmarejo. But Krebs is not overawed by the shine of the yellow metal: “We don’t want to be another mid-tier gold producer. Our strategy is about margins and returns, and so we will likely see more gold production in the future while retaining our primary silver profile.” While the mining industry may be experiencing a short-term contraction, Krebs is bullish on metals and is positioning Coeur for the future. In addition to the potential at La Preciosa, he sees large upsides still to be extracted from Palmarejo, with seven more years of mine life and satellite deposits likely to boost that number as development continues. “We still haven’t even set foot on about 80% of the property,” says Krebs. In 2012, Coeur invested $20 million in exploration to further delineate two promising satellite deposits, La Patria and Guadalupe, located nine and six kilometers, respectively, southeast of Palmarejo. He believes that in a few years’ time, Coeur’s shareholders will benefit from the company’s strategic vision and perseverance. “There will always be fluctuations,” he says. “You can’t run from flavor of the month to flavor of the month. With Coeur we have our eyes on the horizon, and we’re charging towards it.” Mining Leaders

Project focus

Silver Bull Resources TSX: SVBL & NYSE: SVBL

Ticker Location

Coahuila state

Resource

167.5Moz Ag; 2.19Blbs Zn; Inf: 126Mlbs Cu & 538.6Mlbs Pb

Sierra Mojada

Multi-metals producing mines are becoming increasingly popular with investors today and Sierra Mojada, Silver Bull’s flagship project, is aiming to follow the trend. Metalline Mining, who explored the property for 16 years, focused solely on discovering zinc deposits, even though the zinc sat below vast surface-level silver reserves. “It was funny that they ignored the silver resource because you would literally walk all over it and the zinc zone was far below,” says Timothy Barry, former President of Dome Ventures and now Silver Bull’s President and CEO. “We recognized that it was a great opportunity to get two commodities for the price of one, so we merged Metalline Mining and Dome Ventures to form Silver Bull Resources.” Sierra Mojada’s resource estimate includes historical data collected by Metalline Mining—but never released in any previous report. Silver Bull was advised to twin 10%-15% of previous drill holes and if there was a strong correlation

sierra mojada

torreon

It was funny that the silver resource was ignored because you would literally walk all over it and the zinc zone was far below.

Timothy Barry President & CEO Silver Bull Resources

between the new and historical data, the findings could be included in a resource update, which is exactly what occurred. Barry brought the indicated resource estimate to 167.5Moz of silver and added large inferred quantities of copper and lead. So far, intercepts have been as high as 900g/t Ag over 17 meters and 150g/t Ag over 50 meters. For the moment, the company has no plans to explore other parts of the zinc zone as they focus on the viability of extracting silver. They will, however, drill a further 1.4 kilometers

coahuila

from the high-grade mineral deposit already detected to establish the resource depth and width. Feasibility studies and the construction of the mine will take 1824 months to complete, meaning 2016 will be the “year of the bull.” Away from the high-grade silver zone and the zinc zone, are the Dormidos and Palamos Negros targets. Silver Bull has already taken samples and finished mapping the areas, providing them with information on the viable drill areas. At surface level, there have been discoveries of mineralization deposits containing 500 g/t of silver with 20% lead. Silverbull's main priority right now is to understand the mineral concentration rather than to offer a concrete resource estimate. But, the company roughly estimates that the Sierra Mojada mine should process between 9,000 and 10,000 tons per day, which means a total of 5Moz-6Moz of silver per year—a significant level of silver production even by Mexican standards, lending weight to the company’s belief that it should become a major silver producer in the near future. A juicier detail is the existing railway line connecting to the mine: meaning the zinc concentrate produced can be transferred directly to customers without the need for a processing plant, saving time and reducing costs. According to Barry, “the project is a real game changer.”

project roundup sonora

chihuahua 3

sinaloa

mexico state 4

el tigre El Tigre Silver Corp (TSX-V: ELS, OTCQX: EGRTF, Frankfurt: 5RT) RES: Est. 75Moz Au from 1903-1938 2013: Further drilling & release of resource estimate

Stuart R. Ross President and CEO

El Tigre is a narrow but rich epithermal vein system, topped by 200 meters of disseminated rock, a rhyolite sequence with vein rib systems all the way through. Our recent focus on the halo zone around the vein system has so far unearthed disseminated material containing gold from 0.3 g/t to a little over 1.0g/t, with silver values ranging from 15g/t to 60g/t. We predict a mineable block around the vein, 150 meters by 1.2 kilometers by 200 meters, open at both ends. We plan to drill about 25 holes this month— enough to define a resource by the second quarter of 2013.

COSALÁ DISTRICT Scorpio Mining Corp (TSX: SPM) San Rafael RES: 28.4Moz Ag, 648mlbs Zinc 2013: Development & Research

Pierre Lacombe President & CEO

We have 40 exploration prospects on our 26,819 hectare land package in the Cosalá district, defined as such because of either past drilling by others, or for outcrops with grab or channel samples taken. The prospects where we are targeting drilling this year are: Venado, Los Cristos and San Ramon. Each target will see from 2,000 to 3,800 meters of drilling. It’ll be just a poke at some greenfield prospects this year, but if we get good intercepts, we have $26 million in the bank and cash flow to continue drilling.

SAN Julián

Fresnillo (LSE: FRES) RES: If 153.8Moz Ag , 780,000oz Au 2013: Detailed engineering and construction of plant

Octavio Alvídrez CEO

The San Julián project is the next mine in the pipeline. It will contribute to Fresnillo’s goal of producing 65Moz silver and 500,000 ounces of gold in 2018. Located on the Chihuahua Durango border, San Julián will eventually see average annual production of about 9.6Moz silver and 40,000 ounces of gold. We expect production to begin in the second half of 2014 via an underground mine. San Julián will form a new district for Fresnillo. Our strategy is to build districts because each ounce has more value due to the operational synergies derived.

MIRASOL

IMPACT Silver (TSX-V: IPT) RES: 1.8m @ 945g/t Ag, 8.94m @ 183g/t Au & 12.25m @ 112g/t Au 2013: Further development

Frederick Davidson Managing Director

Miners have explored Mexico’s Zacualpan silver-gold district since the conquistadores, but until Mirasol there had never been a silver-bearing vein discovery. We started exploring in 2006 and initially found just a single low-grade vein, but further drilling uncovered another seven veins with grades averaging 216g/t preserved at depth in a mineralized system. IMPACT does not see the project as one that will be valued at hundreds of millions of dollars, but rather as a “company maker,” providing the inflow to fund other projects. Mining Leaders

lead issue Pierre Lacombe CEO Scorpio Mining

Nature of the threat

In Sinaloa, we’re quite lucky compared to other parts of the country. There are areas of northern Mexico where only major mining companies, looking at big deposits with good cash flow potential, can afford the costs of security and building a gated and secure community for workers so as to isolate them from the difficult environment. It’s effectively making the employees permanent outsiders, with limited links to what Mexico has to offer. When that becomes the only way to operate safely, it’s unfortunate.

Jesus Herrera Director General Detector Exploraciones SA

From 2006-2012 at least 60,000 people were killed as a result of drug cartel violence in Mexico, according to the NGO, Human Rights Watch. In 2006, when Calderon’s administration came to power, it faced seven established drug cartels. In 2013 the number is estimated at closer to 80. Calderon’s so-called kingpin strategy, where security forces focused on eliminating cartel bosses, only served to fuel infighting and the formation of splinter groups. But there are promising signs: Enrique Peña Nieto’s administration has indicated a shift away from the kingpin strategy, pledging a centralized, state-level police command (first proposed by Calderon), creating a new 35,000-strong police force —the Gendarmerie, and downgrading the military’s role. The goal is reducing violence rather than eliminating cartels. Also, most sources agree that the 2012 murder rate fell 21%-28%. Yet, far from reflecting a change in strategy, analysts believe the drop is a result of cartel dynamics: principally, more clearly defined spheres of influence between rival gangs. Peña Nieto’s administration claims the trend has continued over the first four months in office, but independents criticize government statistics for unreliability. Extortion is a common threat for foreign and domestic businesses alike. In a recent survey conducted by the American Chamber of Commerce of Mexico, 36% of foreign companies reported being extorted in 2012, up from 16% in 2011. In the same survey, 42% of foreign and domestic businesses claimed that security improved but, conversely, another 42% claimed it had remained the same. Whether or not the security situation has improved is perhaps splitting hairs: in the first four months of the Peña Nieto administration, the murder rate stood at a little over 1,000 per month, a marginal improvement at best over the equivalent period in the final year of the Calderon administration. Analysts expect the situation to remain steady over the next couple of years—Peña Nieto’s policy does not currently differ greatly from his predecessor’s. And his promised security reforms, even if they prove to be successful, will take some time to implement.

Security issues here are often sensationalized by the press due to our history of kidnappings and violence. Yet in the 20 years we've been operating—and having worked in some of the most violent states like Sinaloa and Guerrero—our only problem has been the theft of two SUV trucks in a narco-trafficking zone. It’s evidence that Mexico is secure. We can reduce delinquency by creating employment—last year the sector employed over 300,000 people and generated $22 billion in revenues.

Frederick Davidson Managing Director Impact Silver

In seven years, we've never had any serious incidents. Seldom do we feel uncomfortable about the areas in which we operate because there is a mutual understanding between the company and the local organizations. Impact employs over 250 Mexicans in Mexico; so we are highly regarded as a Mexican company, and provided with a groundswell of local information. Our job is to ensure the safety of our personnel and secure the permission of organizations to work, if that's what is necessary. Dunham Craig President & CEO Geologix

There are security issues all around Mexico— there’s no denying it. What you need to do is develop a community relationship program where you work on communication and security—high integrity is essential in the latter. Then you can build trust and avoid security problems. We have not had any issues since the project began. We do a lot of groundwork and education so people know what we’re about—we don't just go in and drill. Some areas, like the US border, are hotter than others, but we´re off the radar in that sense.

SECURITY Cartel territories 2013 (Source: Stratfor Global Intelligence)

sonora

CHIHUAHUA COAHUILA

baja california

NUEVO LEóN durango

ZACATECAS

JALISCO

Cartel de Jalisco Nueva Generación

VERACRúZ

Beltran Leyva Organization Los Zetas Sinaloa Federation Gulf Cartel Knights Templare/ La Familia Michoacana Disputed Territory

Kidnapping/Extortion/Homicide stats by state (per 100,000 inhabitants) 13.98

Extortion

Kidnapping

Homicide

7.66

4.84 3.90

2.08 1.02 0.04

0.21

Sonora

0.28

Chihuahua

1.23

1.16 0.32

0.35

Durango

Zacatecas

1.48 0.85

1.25 0.32

Guerrero

National Average

Mining Leaders

Source: Secretaría de Seguridad Pública 2012

9.95

company focus

First Majestic Silver Corp Ticker

TSX: FR, NYSE: AG La Parrilla, La Encantada, La Guitarra, San Martin and Del Toro La Luz silver project awaiting permit and Plomosas silver project currently undergoing exploration

Projects

Development 2013

First Majestic Silver First Majestic Silver’s slogan of “one country, one mineral, one team” —reflects how a two-man outfit, consisting of CEO Keith Neumeyer and COO Ramón Davila, only ten years ago—is now a company that employs a 100% Mexican staff of more than 3,500 and owns five silver-producing mines in the country. The company acquired its first mine, La Parrilla, in 2004, followed by La Encantada, La Guitarra, San Martin and Del Toro. The flagship silver mine, La Encantada, is located in northern Mexico and boasts a 4,000 tons per day cyanidation mill, producing approximately 4.2Moz to 4.5Moz annually.

We need to help communities feel that they are partners in the wealth that we are creating, or we won’t be able to work at all.

Ramón Davila COO First Majestic Silver

like Sabinas (Peñoles), or San Martin (Grupo México): this kind of geology has proven to host large deposits,” said Davila. Del Toro began operations in early 2013 at 1,000 tons per day, but First Majestic expects this to increase to 2,000 tons per day by the end of July, and double again by July 2014. While the fall in metal prices has led the firm to re-evaluate

However, the rising star in First Majestic’s portfolio is the Del Toro silver mine, located in the Chalchihuites district. “The deposit is hosted in calizas instrusives, similar to other projects nearby,

Silver Production per mine

Silver Ounces (M)

La Luz ( pending permits) La Guitarra Del Toro La Encantada La Parrilla San Martin

15 10

36%

CAG

5 0

Purity of Silver in SEO

Production Forecast*

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

94%

88%

86%

88%

93%

95%

91%

90%

91%

further exploration, Davila says the company is intent on developing Del Toro and La Guitarra. The company has also been encouraged by the strong support Zacatecas state government has given the project, likening their pro-mining outlook to that of Durango state, home to its La Parrilla project. As a Mexican company employing an all-Mexican workforce, First Majestic has a unique insight into the key challenges facing the mining sector in his country: sustainable development and the proposed mining royalty. Davila’s big fear is that the royalty’s proceeds won’t reach the communities where First Majestic works, increasing their financial burden without relieving the cost of providing local community assistance. Davila estimates that 3% of his firm’s revenues are already invested in communities and is concerned that if First Majestic cannot deduct this direct contribution, then funds will not go where they’re needed. For him, the issue is crucial because the viability of operations depends upon the cooperation of local communities. “We need to help communities feel that they are partners in the wealth that we are creating, or we won’t be able to work at all,” said Davila.

project focus

Grupo Bacis Project

El Herrero

Location

Otaez, Durango

Resource

54Moz Ag

Development 2013

Durango exploration

el herrero

Grupo Bacis is a 100% Mexicanowned and run mining com pany—a rarity in today’s globalized industry. Its flagship project, El Herrero gold and silver mine, first started producing during the Spanish colonial era, as far back as 1600. Situated in the state of Durango, the mine processes an average of 1,600 tons per day of gold and silver bulk and produces 4Moz of silver-equivalent a year. The latest resource estimate has pegged reserves at 54Moz of silver, but Grupo Bacis director-general Jaime Gutiérrez believes the silver deposit could exceed 100Moz. The future of the mine is certainly in safe hands. Grupo Bacis is debt-free and El Herrero’s silver production costs per ounce sit at a healthy $10. Combined with the fact that on April 28, 2012, silver hit a record high of $49.51 per ounce, the mine’s future looks very promising. However Gutiérrez is quick to point out that not only is silver known for its price volatility, but also the effect of dollar inflation offsets the rise in silver prices. “Today silver sells at $30 per ounce, but inflation masks the fact that it’s actually worth less than it was in the 1980s,” he says.

Some of our mines began producing as far back as 1600. When I say we are an experienced company, I mean we’ve had a presence in this sector for 300 years.

José Jaime Gutiérrez Director-General Grupo Bacis

durango otaez

in hopes of further expanding the resource. The company expects to drill to depths of up to 1,000 meters around the Las Quebradas hypothermal zone throughout the year. However, Gutiérrez is worried about the effect of the country’s rising energy costs on the mining industry. “We have one of the highest energy costs in Latin America, and the government needs to do more to reduce these costs,” Gutiérrez says. When one considers that laborers working within the mining sector are paid nearly three times the average national wage, capital costs could threaten productivity. Furthermore, mining companies such as Grupo Bacis often operate in high-risk areas. El Herrero mine is situated within a remote part of Durango, leading Gutiérrez to invest heavily in security—“even though,” Gutiérrez adds, “we have never had any problems.”

Grupo Bacis will continue developing and exploring at El Herrero in 2013 Mining Leaders

base metals

lead article

BASE MATTERS T

Photo: Grupo México

hough a controversial character in Mexican history, President Porfirio Díaz pioneered the unlocking of the country’s base metals potential by reforming the antiquated Ordenanzas de Minería and permitting private ownership of the subsoil in 1884. A few years after a small company named Peñoles was founded to explore the hills of Durango. Nearly 130 years later, a China-led boom in base metals is revealing that Mexico— long the world leader in silver production—holds great potential outside of precious metals. Industrias Peñoles, now part of the Grupo Bal conglomerate, a rival to Carlos Slim’s Grupo Carso empire, currently leads the world in production of refined silver, metallic bismuth and sodium sulfate. Peñoles and its compatriot producer Grupo México together dominate the global supply of copper, zinc and lead, with production continuing to increase in 2013. At the same time, several of the country’s major precious metals operations hold significant base metals by-products, with Mining Leaders

lead article

38Mt mexico's total copper reserves, the world's fourth largest copper endowment

Zinc and lead are the major by-products of precious metals mines in Mexico

Goldcorp in particular now beginning to produce large quantities of lead and zinc. Peñoles, which refines the majority of Mexico's lead and zinc concentrate at its Met-Mex complex in Torreón, Coahuila, will likely remain a dominant name in Mexico's base metals market even if Goldcorp’s production begins to challenge the Mexican giants. Although Chile and Peru dominate global copper markets, Mexico is slowly becoming a real player in production of the red metal. It possesses the world’s fourth-largest copper reserves at 38Mt, following Australia (86Mt), Peru (90Mt) and Chile (190Mt). In 2012, Mexico produced 426,372 tons of the metal, a 6% increase on the previous year. Managing industrial relations has proven key in maintaining steady output figures. Copper production centers on the Minera María and Buenavista del Cobre open-pit projects in Cananea, Sonora, which in 1906 was the site of a miner’s strike that would help catalyze the 1910 Mexican Revolution. More recently, a three-year labor dispute at Buenavista del Cobre, which holds the largest copper reserves on earth, caused a production drop from 335,502 tons in 2007 to 227,750 tons in 2009 before rebounding. In June 2013, Minera María also went offline due to a union decision. Despite its turbulent history, Buenavista del Cobre remains the future of copper

production in Mexico. In 2012, the mine produced 200,000 tons, nearly half of the country’s output. Grupo México is now planning aggressive expansion to make Buenavista del Cobre the world’s second-largest copper mine, with production targeted at 512,000 tons by 2016. If all goes to plan, the firm will also become one of the top five copper producers in the world. Mexico's base metals sector is highly competitive. Grupo México may be king of copper, but Peñoles reigns over production and refining of lead, bismuth (the brittle pinkish metal used in pharmaceuticals and as a lead substitute due to its hard qualities), and also dominates the Mexican

zinc market. During 2012, Peñoles' zinc production remained stable at 182,000 tons of concentrate from its eight Mexican mines. The company’s Francisco I. Madero mine in Zacatecas produced 25% of its zinc, while Bismark in Chihuahua and Tizapan in Mexico state contributed 21.7% and 19.5%, respectively. Goldcorp’s enormous polymetallic mine, Peñas quito, has emerged as the largest single source of zinc ore, producing 162,100 tons of zinc and 76,850 tons of lead in 2012. In 2013 these figures should reach 142,500–152,000 tons of zinc and 72,500–80,000 tons of lead. Foreignowned enterprises are also getting in on the Mexican zinc boom: Belgian firm Nyrstar, for example, owns one Mexican Copper Production 2004–13

450,000

45,000.00

Production value (in millions MXP, right axis)

400,000

40,000.00

Annual copper production (tons)

350,000

35,000.00

300,000

30,000.00

250,000

25,000.00

200,000

20,000.00

150,000

15,000.00

100,000

10,000.00

50,000 0

5,000.00 2004

2005

2006

2007

2008

2009

2010

2011

2012 Q12013

0.00 Source: SGM

lead article

Photo: Azure Minerals

of the country’s largest zinc mines, Campo Morado in Guerrero, which in 2012 produced 40,000 tons of zinc concentrate and 5,600 tons of copper concentrate along with substantial quantities of gold and silver. Mexico has focused on adding value to its base metals sector with domestic smelting and refining services. Peñoles' ownership of MetMex—the leading Latin American producer of refined lead and the top domestic producer of refined zinc—offers the Mexican firm huge revenue streams in addition to its raw materials extraction. In 2012, Peñoles’ smelting business logged $6.6 billion in metals sales. Last year Met-Mex produced 129,100 tons of lead, 230,000 tons of zinc and 142,600 tons of lead bullion. Peñoles was also responsible for mining and refining 798.5 tons of bismuth. The country’s other zinc refinery, Grupo México’s San Luis Potosí facility, produced 93,500 tons of refined zinc in 2012, mainly sourced from its nearby Charcas mine. The next few years will see plenty of new base metals projects come online, especially in copper. Grupo México is advancing its $175 million Angangueo copper and zinc project in Michoacán. Production there is slated to begin in the second half of

Sunset over Azure Minerals' Promontorio project

2015, with estimates of 10,400 tons of copper and 7,000 tons of zinc, along with significant quantities of lead and silver. The company is also advancing its El Arco deposit on the Baja Peninsula. “This is one of the only undeveloped world-class copper deposits left on the globe,” says Xavier García de Quevedo, president of Minera México, one of Grupo México’s mining divisions.

230,027t

Peñoles' refined zinc production in 2012

According to Grupo México, El Arco will produce 190,000 tons of copper in 2017 following a $2.6 billion investment. South of El Arco, in Baja California del Sur, Canadian company Baja Mining’s sold a majority stake in its El Boleo project to a Korean consortium led by Korea Resources Corp in July 2012. Production of 56,750 tons of copper, 679 tons of cobalt and 25,400 tons of zinc should begin in 2014. Korea is not the only Asian country interested in securing a supply of base metals. Chinese investment in

Mexican mining may be timid in comparison to the capital it ploughs into Brazil or Peru. But one company bucking the trend is Chinese nickel and copper producer, Jinchuan Group, which acquired Tyler Resources and its Bahuerachi copper project in 2008. Located in southwest Chihuahua, Bahuerachi is a 12,000-hectare proj ect with a resource of 525Mt of 0.4% copper and 0.55% zinc. In 2011, Jinchuan reported that it would invest close to $4 billion dollars developing the mine. Two Japanese companies, Dowa Metals and Sumitomo Corp, respectively own 39% and 10%, of Peñoles’ Tizapa mine. “We’re seeing many Japanese companies funding juniors with zinc assets to make sure they survive the difficult markets,” says one CEO interviewed by Mining Leaders. While zinc may be coveted by Japan’s private sector, copper attracts the most interest from the Japanese government. One example is the partnership between the Japan Oil, Gas and Metals National Corporation (JOGMEC) and ASXlisted base metals explorer, Azure Minerals, to explore the Tortuga project in Sonora. “Japanese money is being spent in Mexico, which is unusual,” says Tony Rovira, Azure's president and CEO. “It’s good for Mexico to see capital entering from other countries besides Canada or the United States.” Mining Leaders

feature interview

MExico

at the Crossroads

Under the leadership of Xavier García de Quevedo, Grupo México-Minera México is planning to become the world’s thirdlargest copper producer by 2015. Mining comprises the lion’s share of the conglomerate’s activity. The group has recently launched a multiyear, multibillion-dollar investment program. García details the investment strategy and describes his ultimate prize: gaining market share in Asia.

“I

’ve worked in mining for 43 years, so I’ve seen the different cycles of the mining industry,” says Xavier García de Quevedo, President of Grupo México-Minera México. Even in the face of tough economic conditions, 2012 was clearly one of the good times. Last year, Grupo México posted record production of 826,209 tons of copper, leading to sales of $10.18 billion, from its 12 mines across Peru, the United States and Mexico. Though Grupo México is a large, diversified conglomerate spanning railroads, construction, energy and oil and gas, its Americas mining division—which includes Southern Copper Corporation, Minera México and ASARCO—

contributed 80% of revenues last year. Grupo México is a leading producer of precious metals and industrial metals including zinc, molybdenum and lead, but copper has been, and will remain, king. The firm has the largest copper reserves and lowest cash costs worldwide.

complement and reinforce the company’s mining activities. The mining division received most of the capital expenditure, with $650 million directed to Buenavista del Cobre, Grupo México’s star asset. In 2013 this will rise to $1 billion for a total investment of $3.5 billion.

García is in the second year of an ambitious, multibillion-dollar investment strategy, which aims to make Minera México world's third-largest copper producer. The plan began at the end of 2011 when the board of directors approved $2.12 billion in investments for 2012. Strategic investments in infrastructure and trans portation businesses aim to

Buenavista, already one of the world’s largest copper mines, lies in Sonora, 50 kilometers south of the Arizona border. In 2012, it produced 200,070 tons, about 25% of the company’s production. “All the work we’ve started in the past couple of years has begun to pay off,” explains García. A new solvent extraction and electrowinning circuit, a molybdenum

Xavier García de Quevedo

Grupo México's Global Mining Operations

plant and a copper concentrator will boost production to 512,000 tons in 2015 from reserves of 25Mt, making it the world’s second-largest copper mine. The program will also increase molybdenum and zinc production by 40% and 100%, respectively. By 2015, the group’s annual copper production should rise to 1.4Mt, behind only Chile’s Codelco and Freeport-McMoRan. García based this strategy on his longterm bullish view on Asian demand for industrial metals. “Our future market is the Far East, where we are now establishing a presence,” he says. Of the group’s total minerals sales, the United States accounts for 47%, Latin America (including Mexico) 30%, Europe 17% and Asia 6%. Diplomatic events could speed up Mexican trade with Asia, however. In April, President Peña Nieto, with his commercial delegation, visited Japan and China. “The President was acting wisely [with these visits] in order to sign a handful of energy deals,” says García. “I expect similar deals to emerge in the future with minerals, but I also believe that our commercial ties will move toward an equilibrium and beyond just raw materials. Mexico is a leading high-tech manufacturer, and I’m optimistic about these products finding a market in Asia.” García believes the proposed mining royalty being discussed in the legislature is inappropriate for Mexico. “Mining companies pay mineral rights, royalties and other contributions, which together with the income tax, profit sharing and accounting income, means the Mexican mining industry is taxed at 46.5%, which is already a high load.” On top of the fiscal levies comes the high cost of energy and water rights. To counter these high energy costs, Grupo México is constructing a $150 million wind farm in Oaxaca that will generate 74MW by 2014. Grupo México’s infrastructure division is also constructing two $550 million natural gas-powered plants in Sonora to provide 500MW to Buenavista. “Renewable sources of

Mexico D.F.

Offices

Lima

Mines Plants Explorations

energy such as hydropower fit well into the strategy of providing power to areas that lack infrastructure,” explains García. The group’s El Arco project in Baja California is one of “the only undeveloped worldclass” copper deposits, whose progress has stalled due to lack of infrastructure, though García is confident that it will be developed in the future. “My largest worry for the sector is creating sustainable development—and perfecting the balance between growth and conservation.” For García, investing in the company’s employees offers the best means of achieving this balance. Last year the company provided over one million hours of training courses across many disciplines for its 30,000 employees.

With Mexican mining at a crossroads, Grupo México plans to forge ahead with its multibillion-dollar expansion to develop Buenavista and the rest of its mining business. A new mining law may change the financials of each mine, but the prospect of increasing market share in Asia leaves room for significant growth. And having recently acquired exploration prop erties in Chile, García says that they are seeking further opportunities in Ecuador and Argentina. But despite the interest in Asia and the Americas, its roots are in Mexico. Having the largest copper reserves in the world, the company is moving ahead with its plans to make sure it enjoys more years of good times ahead. Grupo México's Mining Production Annual Production

Mining Division

2011

2012

790,103

832,752

(Mt)

18,632

18,220

Zinc (Mt)

90,663

93,392

Silver (Koz)

17,411

18,375

Gold (Oz)

60,748

63,127

1,887,526

1,931,851

Copper (Mt) Molybdenum*

Sulfuric Acid

(Mt)

* ASARCO does not produce this mineral.

Mining Leaders

Project focus

Velardeña Operator

Industrias Peñoles

Ticker

BMV: PE&OLES

Location

Durango

Resource

2.14Mt Zn

Development 2013

Initial Production

Velardeña

Located in Durango state, the dome arching over Industria Peñoles' Velardeña project immediately grabs the attention. Despite its rather cinematic appearance, the dome is there for practical purposes: first, to prevent the migration of minerals and material into the environment, and second, to protect the mine from rain. Velardeña’s design strives to follow a sustainable blueprint: its dozen solar cells, for instance, have greatly decreased fossil fuel consumption. The mine is also equipped with water treatment plants, enabling reuse in a country battling water shortages. Velardeña is Peñoles’ third operation in Durango, added to the La Ciénega and San Ramón projects. The reboot of operations at Velardeña in April 2013, signified far more than the rebirth of mining in the arid town, which lies 200 kilometers northeast of Durango City. When operations at

Velardeña had closed for a few years earlier in the decade, it devastated the local economies of the nearby municipalities of Cuencamé, Pedriceña and Cuatillos. On reviving the project in 2011, Peñoles began the construction phase by employing between 600 and 700 staff. However, that number could rise above 2,000 as building progresses.

Industrias Peñoles has invested over $200 million in bringing Velardeña back into operation. The mine is

coahuila

durango la ciénaga san ramón

met-mex velardeña

Peñoles Mining Division Production & Reserves Participation Mine

(%)

Ore milled (metric tons) 2011

Total Reserves ('000 tons)

2012

2011

2012

Naica

100

654,839

7,68,483

14,742

18,010

Sabinas

100

1,261,423

1,221,334

14,616

15,640

Bismark

100

737,819

666,595

7,873

7,916

Francisco I. Madero

100

2,323,695

2,342,426

40,561

47,875

Milpillas

100

2,210,101

2,356,563

27,522

23,498

Velardeña

100

Tizapa

709,780

792,981

10,451

29,137 11,240

expected to process 6,000 tons per day, second only to Peñoles' Madero zinc mine, which processes 7,000 tons per day. Production will be broken down into 490 tons per day of zinc, 120 tons per day of lead and 80 tons per day of copper. The average zinc ore grade stands at a respectable 4.59%. The project has an annual capacity of 1.9Mt, producing 75,000 tons of zinc concentrate per year. Peñoles’ current leading zinc operation, the Francisco I. Madero mine, produced 45,455 tons of zinc concentrate in 2012. But Velardeña's comeback should make it the company's top zinc producer. The mine is economically sound and competitive for Peñoles largely due to its proximity to the city of Torreón, enabling easy shipping to the company’s Met-Mex metallurgical treatment and refinement plant. Lower freight costs will be a key factor in its competitiveness. Met-Mex is Mexico’s top refiner of zinc; Peñoles produced 230,027 tons of the metal in 2012. And with production now near full capacity, Peñoles can expect even stronger refinery numbers in 2013. Velardeña’s comeback exemplifies the global mining sector’s renewed emphasis on zinc. With supply predicted to fall in 2015, miners are focused on preparing zinc assets to cater for scarcity after large mines in Australia go offline.

article

the missing zinc Mexico is one of the world's top ten zinc suppliers, producing 450,000 tons in 2012 of the fourth most-consumed metal and generating around $925 million in revenues. But production has remained relatively flat over the last 10 years, with the 2012 figure not much above that of 2005 at 427,000 tons and below 518,000 tons in 2010. This is partly due to a weakening zinc price since the boom years of 2005 and 2006, when the metal sold for up to $4,380 per ton. By May 2013 the per-ton price had fallen to $1,830. The situation could soon change, with an anticipated shortage of zinc on the horizon. Mexico's big producers are gearing up to meet this surge in demand. In May 2013, Xstrata Zinc closed its Brunswick mine in Canada after nearly half a century, removing 265,000 tons of zinc from the market. An even bigger project—Minmetals Resources' 500,000 ton per annum Century mine in Australia—is scheduled to close in 2015. With zinc being a key ingredient in steel galvanization, demand for the "infrastructure metal" is expected to remain high, driven by the construction sector in emerging markets. Mexico's two largest zinc refiners, Grupo México and Industrias Peñoles, are targeting an expansion of their smelter capacity in the coming years. Peñoles plans to expand its current operations in Torréon, while

Grupo México will soon build a new zinc refinery in Empalme, Sonora.

water—it's in smelters’ interest to make sure projects are developed.”

With zinc among the most common by-products of the country's precious metals mines, the new smelters will have ample supply of concentrate and should be able to leverage attractive smelting fees. Goldcorp's Peñasquito gold mine should produce around 130,000 tons of zinc in 2013. A June 2012 resource estimate at Scorpio Mining's Nuestra Señora silver project identified 650Mlb of zinc. “The smelters and end users have an interest in locking up concentrate supply now to keep their unit costs down,” says Pierre Lacombe, the firm's CEO. “We've also seen Japanese zinc smelters providing capital to juniors with inferred zinc resources to make sure they keep above

Mexico's zinc is garnering interest from other Asian players as well, with Korea Zinc now purchasing about half of annual production. Infrastructure is already in place to export from the Pacific ports of Lázaro Cárdenas, Michoacán and Manzanillo. Silver Bull, a silver explorer sitting on a resource of nearly a billion pounds of zinc, is a happy beneficiary: “There's a railway running past our Sierra Mojada project,” says the firm's CEO. “We don’t need to build a processing plant. We can just create a concentrate, throw it on the train and send it anywhere.” The conditions are in place for zinc to become an increasingly important part of Mexico's mineral exports. Total Mexican Zinc Production & Value

Zinc volume ('000 tons)

Production value (Million pesos)

16,000

550

14,000 450 12,000 10,000

350

8,000 250

6,000 4,000

150

2,000 2004

2005

2006

2007

2008

2009

2010

2011

2012

Mining Leaders

analysis by Jorge Ramiro Monroy Managing Director Emerging Markets Capital

What’s Stopping China?

As the Managing Director of the Hong Kong–based Emerging Markets Capital, Jorge Ramiro Monroy links Asian investors to projects in the emerging markets. Ramiro explains why Chinese investors haven't yet invested in Mexico to the same level as they have in Brazil or Peru.

or many years Mexico has consistently ranked as a topten jurisdiction for mining. The country has political and macroeconomic stability, low labor costs, exceptional FDI protection laws, high exploration potential and far better infrastructure than most countries in Latin America. There are over 500 assets in Mexico owned by Canadian companies, as well as significant investment from American and Australian firms. However, when we approach Chinese investors with an investment opportunity in Mexico, a typical reaction will be: “We don’t know anything about Mexico. Do you have anything in Argentina or Bolivia?” Given that both these countries have significantly higher political risk than Mexico, it’s a surprising response. Exact numbers for Chinese investment in Mexican mining are hard to come by; estimates vary from as low as $5 million

Source: Presidencia de la República

to over $300 million. According to the Heritage Foundation, Chinese investment in the Mexican mining sector came to $210 million between 2005 and 2012. However, many Chinese investments into Mexico are done through a Hong Kong, Canadian, or offshore subsidiary and do not register in the official numbers, meaning the real figure is undoubtedly much higher. Jinchuan Group alone is said to have invested $300 million in 2012 for its Bahuerachi project in Chihuahua and is expected to invest $500 million more this year. Nevertheless, while Chinese investment is higher than officially reported, it still falls well below the $7.2 billion the country invested into Peruvian mining projects between 2005 and 2012, as well as the $2.5 billion invested in Chile and the $4.4 billion in Brazil in the same period. Speaking to Chinese investors has given us an insight into the possible causes

behind the country’s modest investment in Mexico. We believe that the media effect of drugs-related violence on Chinese investment is overestimated. Chinese firms are used to investing in far more violent and unstable countries, especially in Africa. Hence we have identified three main deterrents to Chinese investment. The first issue is a general lack of knowledge about Mexico as a country and as a mining jurisdiction. Chinese investors often group Mexico in the same political risk quartile as Bolivia, Mongolia, Ecuador or Argentina. They have the impression of Mexico being a war-zone, through what they hear on the news, and know little else about the country beyond that. Nothing could be further from the truth. Mexico has a long history of protecting FDI. American, Canadian, Spanish, Korean and Japanese companies have been investing in the sector for decades. No foreign asset has been seized in modern

Chinese Investment VIOLENCE in IN MEXICO MEXICO 8,000 7,200

China's Investments in Latin American Mining 2005–12 ($M)

7,000

more than

500

6,000

5,000 4,400 4,000

3,000

2,500

2,400

2,000

1,000

Brazil

Chile

Peru

Ecuador

500

410

Cuba

Venezuela

210

mining assets in mexico are owned by canadian firms

Mexico

Source: Heritage Foundation

times. Mexico's mining royalties are among the world's lowest. The state has no capital controls and no restrictions on foreign ownership. Meanwhile, there's an excellent workforce and infrastructure generally not found in developing countries. Nevertheless, risk perception in China seems to be radically different. Secondly, Chinese investors can be sensitive to diplomatic relations. We have noticed that Chinese firms prefer to invest in Latin American countries which have special relations with the Chinese government and which are also somewhat ideologically aligned to them, such as Bolivia, Ecuador, Argentina, Venezuela and even Cuba. We have been told by several mining companies that they feel their investment would enjoy special protection in these countries given their government-to-government relationships, pro tections that no other Western country would provide. In some of these countries, Chinese companies can acquire a project through direct negotiation with the government, in contrast with projects in Mexico, which must be acquired through an open-market transaction. Chinese companies should look at these countries’ track records in seizing foreign assets, imposing steep royalties, limiting foreign ownership and imposing capital controls. Countries like Peru and Ecuador may offer favorable FDI terms now, but both President Humala of

Peru and President Correa of Ecuador ran on populist agendas, so it remains to be seen if these policies will change once they consider they've attracted enough foreign capital. If China takes a page from its experience in investing in other socialistleaning countries, it would see that in the long run, it's better off spending time identifying and acquiring a high-quality project in Mexico. The last issue is competition. With a large presence of international and major local firms in Mexico, good deals in gold, silver or copper have plenty of takers. Companies already operating in the country can acquire a project and move equipment faster, thereby earning a substantial cost advantage over a Chinese newcomer. Companies established in Mexico also require significantly less time for due diligence than a Chinese company. Mexico’s vibrant steel industry means there is plenty of internal demand for iron ore and coal. Iron ore is a special case in Mexico. There are many small Chinese trading companies and at least a dozen of them have some level of ownership in small mines. However, a 2011 restructuring of export licenses for iron ore has left many Chinese trading companies unable to obtain permits, significantly decreasing Chinese interest in Mexican iron ore. We strongly believe that Chinese companies should consider Mexico as

a top investment destination for gold, silver and copper. We also think there is significant room for them to invest in iron ore. The key is to establish a presence in Mexico. There are no restrictions on foreign companies acquiring an asset in Mexico, but the asset has to be acquired by a Mexican-registered subsidiary, which can be 100% foreign-owned. We have learned from the Mexican Geological Service that some Chinese buyers have missed out on purchasing a property they were interested in because of the time it took for them to incorporate a Mexican subsidiary. The first step for Chinese companies would be to establish a Mexican company so that, when a good project becomes available for sale, the Chinese company is ready to buy. Investors are generally looking for projects which are close to production and have large-scale production poten tial. Typically, such projects are relatively easy to find. For gold and silver, and to a lesser extent copper, many projects are listed in Canada or the United States, which makes due diligence easier.

Emerging Markets Capital is a Hong Kong– based company dedicated to connecting Asian investors with quality investment opportunities in emerging markets.

Mining Leaders

company focus

Virgin Metals Ticker

TSX-V: VGM

Projects in Sonora

Los Verdes: M&I (nonoxide): 24,912 Mlbs Mo; 114,896 Mlbs Cu. Cuatro Hermanos: In 896 Mlbs Cu; 95Mlbs Mo. If: 2,141 Mlbs Cu; 277 Mlbs Mo.

Virgin Metals

In 2008, the price of molybdenum collapsed. The onset of the global financial crisis and the resulting fall in demand for steel, combined with lessening Chinese demand, caused the metal to plummet from $35 to $15 per pound. For Virgin Metals, a Canadian explorer operating in Mexico on what at that time was considered to be a pure molybdenum play, drastic measures had to be taken. In 2010, a new management team was drawn up, an experienced geological team drafted in, and the reclassification of Los Verdes, the core asset, begun. “There were a number of holes in the Los Verdes prefeasibility study,” says Chris Frostad, CEO of Virgin Metals. The previous team, motivated by the seemingly endless surges in molybdenum prices, had focused on that mineral, ignoring the extensive copper metallurgy present at the

Once financing is complete for Los Verdes it gives us a little more wind under our wings. We can begin to look at our Cuatro Hermanos site—this has the potential to be a worldclass deposit. Chris Frostad CEO & President Virgin Metals

site. The prefeasibility study showed a mine life of eight years, with large capital costs, but little upside. The new team came from Castle Gold, who had successfully built the nearby El Castillo gold mine and then sold it on to Argonaut Gold. They brought with them the technical, engineering and metallurgical skills necessary to expose the huge copper potential on site and to define a strategy to garner

hermosillo

SONORA

CUATRO HERMANOS

LOS VERDES MEXICO df

the greatest shareholder value from the asset. From that point onwards, Virgin Metals moved fast. In 2011, the neighboring Potreritos deposit was acquired and added substantially to the resource. In January 2012, a preliminary economic assessment was released which reduced project capex by 35%, showing 85% recovery rates for copper, molybdenum and silver, and daily production of 3,000 tons. An update to the 2008 PFS is due in the latter half of 2013 and construction of an open-pit mine and flotation plant will follow. “Capex will amount to between $90 million and $100 million. Los Verdes is a fairly modest mine— 100Mlbs of copper, with a 12-year mine life—but it is a business builder.” Los Verdes will likely become the base from which the company develops. Cuatro Hermanos, a project with a potential resource of 2Bt–3Bt, could be the game-changer. Canadian Occi dental held the project in the 1970s, but was forced to pull out for political reasons. It left numerous, untested drill pads. The deposit is now fairly low-grade, but Frostad believes this will change: “It's not a difficult geophysical task to reexamine that whole area and look for proper targets. This is the one with the potential to be a world-class deposit.”

Project focus

Promontorio Operator

Azure Minerals Limited

Ticker

ASX: AZS

Location

Chihuahua

Resource

840,000 tons @ 4.1% CuEq (@ 0.5% CuEq cutoff) In. & If.

Development 2013

Feasibility study

Promontorio Azure Minerals is one of only two ASX-listed companies operating in Mexico. But as other explorers start to clue-in on Chihuahua’s geology— which hosts remarkably high grades at Azure’s flagship Promontorio project— managing director Tony Rovira predicts they will soon have company. Located in the Sierra Madre mountains, Promontorio’s geology of epithermal mineralization differs markedly from that found at Grupo México’s enormous Buenavista del Cobre mine in Sonora, where copper grades average 0.43%. Promontorio’s copper, gold and silver veins, while narrow, yield average grades almost 10 times higher. With an updated resource estimate from the Australasian Joint Ore Reserves Committee in hand, Azure’s next step is designing the underground mine. The narrow veins dictate a surgical approach— Azure plans to extract the mineralization without taking any of the rock alongside it, thus maximizing ore recovery and minimizing dilution. Mexico's industry is well versed in underground operations, and Rovira has few concerns about finding a contractor to handle the project. The firm estimates Promontorio’s capex at $35 million, predicated on purchasing and shipping new equipment from China. "But if we can buy secondhand locally, either from within Mexico or the United States, we’re confident we could reduce the cost by at least $10 million," says Rovira.

Promontorio is a worthwhile economic prospect in its own right, but Cascada has the potential to be a game-changer.

Tony Rovira Managing Director Azure Minerals

Azure is in discussions with various smelters about processing its copper. The firm is also contemplating selling copper concentrate to a global minerals trader, who would then sell it on to the smelter. "The beauty of this is that you can sell the resource at the mine gate and remove the financial burden of transporting the ore to the smelters," says Rovira. Likewise, Azure’s management is debating which form of financing to

pursue for the project. One option is metal streaming, though Rovira will not make a firm decision on this until he knows just how productive Promontorio will be. He is certain, though, that Azure won’t seek to duallist on the TSX: “Canada is still in the doldrums; it’s extremely difficult to raise any money there. Although the ASX is still a little weak, it’s not dead. There is funding available for good projects like Promontorio.” In one day, Azure recently raised A$2.5 million on the ASX based on drilling results from the Cascada prospect, located only 200 meters from Promontorio, where one 70-meter core graded at 2.7% CuEq, including 11.25 meters at 10.5% CuEq. “Promontorio is a worthwhile economic prospect in its own right, but Cascada has the potential to be a game-changer,” says Rovira. “We are now in the middle of drilling out Cascada and look forward to combining Promontorio and Cascada into one mining project.” SONORA

chihuahua

chihuahua promontorio

Mining Leaders

lead issue

POWER

PLAYS

Todd Thurlow Vice President Pace Global

Electricity can account for up to 40% of operating costs in Mexico, so lower energy costs increase a project's valuation. For Chesapeake Gold’s Metates project, we recommended self-supply. The CFE tariff is about 12 cents per kilowatt, which, based on Metates' expected load, would cost $470 million. Conversely, a 500MW natural gas plant, at a reasonable natural gas price of $4.50 per MMBtu, for example, could produce power at 7 cents per kilowatt. This equates to $190 million per year in savings, or $157 per ounce, based on estimates.

José Alfredo Heredia Navarro Director General DNA Mining

In Mexico, national electricity prices are set by the Federal Electricity Commission (CFE), which operates power plants across the country, generating about 53,114MW by the close of 2012. While the CFE is a reliable option, its electricity is traditionally expensive and volatile, based on fuel costs and politics. According to the CFE, the average large-scale industrial tariff rose to 125.24 centavos (about US$0.09) per kilowatt in April 2013. Annually the price has risen on average 11.1% since 1999. The price increase has become burdensome for many mining companies. On average, electricity accounts for 40% of the total costs of a mine, tightening the margins for any operation. This has led mines to seek the self-supply option of either building a power plant or entering deals with independent power producers (IPPs) throughout the country. Under typical arrangements, the IPP is responsible for construction and operation of a dedicated power plant. Goldcorp and Grupo México, among others, have selected the self-supply option to lower their energy costs. Though the upfront investments can be high (Chesapeake Gold’s PEA predicts $732 million for a combined-cycle plant), the cost of electricity can be up to 50% lower than the CFE option. By choosing self-supply, miners mitigate the risk of volatile CFE prices, but an IPP also lets them hedge the price of natural gas. Lower energy costs mean higher valuations. Both the shale gas boom in Texas and the Mexican government’s decision to build two new gas pipelines through the heart of Mexican mining country will benefit miners building their own power supplies. While natural gas has far lower emissions than diesel, miners are also looking at innovative renewable technologies such as wind and solar generation. Electricity costs have long stymied Mexico’s competitiveness compared to the United States or Peru, but miners are now taking the issue into their own hands.

Generating your own electricity is more expensive than buying it from the CFE, but sometimes the cost of investing in a plant will be lower over the long term. It could cost a lot to invest in 60 kilometers of power lines to connect to the CFE grid. When a mine closes you can disassemble the power plant and send it to use at a different mine. In the case of power lines, after the mine closes, under law they become property of the state. It’s an investment and you have to analyze it case by case.

Ricardo Silva Torres President & CEO Energía Solar y Proyectos Sustentables

Solar power is an efficient, cost-effective energy source that does not produce carbon emissions. Over the last six years or so, electrical costs have risen in Mexico. Solar power is cost-effective in the long term and solar energy projects are 100% tax-deductible. Solar panels should last for 25 years but buyers must beware of companies offering very cheap products that might collapse within the year. Reputable companies are worth investing in.

Mitchell Krebs President & CEO Coeur d'Alene Mines

Supplying power can be a challenge for some mines in Mexico. Since operations started at Palmarejo, the federal grid has reliably met our power needs. We have eight generators on site to use as backup, which we’ve used three times in the history of the mine. The generators are good to have as insurance, but the electricity coming from the federal grid has been secure and consistent. The power runs by the local town of Palmarejo on its way to our operation, so we connected the community to the grid.

lead ISSUE New Natural Gas Pipeline System

sonora chihuahua

durango

sinaloa

SEMPRA Pipeline

140.00

11.1% average annual increase in CFE Tariff

80,000

70,000

Energy Cost in Copper-Producing Countries

120.00

CFE Generation Private Generation

Price

14.1

Congo

12.1

Chile

Mexico

100.00

8.8

Australia

60,000 80.00

50,000

40,000

60.00

30,000 40.00 20,000 20.00

7.8

Argentina United States

7.5

Zambia

7.4

Canada

Estimation of cost, projects 2014â&#x20AC;&#x201C;20 (cents/kWh)

6.6

Peru Mongolia

10,000

Price (centavos/kWh)

Generation (GWh)

Growth of Private Combined Cycle Plants in Relation to CFE Tariff Increases (centavos/kWh) 90,000

Source: Chesapeake Gold

TransCanada Pipeline

6.1 5.3

Kazakhstan 2.6 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: CFE

Source: Consejo Minero

Mining Leaders

project focus

Las Cuevas Operator

Mexichem Fluor

Ticker

BMV: MEXCHEM*:MM

Location

San Luis Potosí

Resource

50Mt (85% Fluorite)

Development 2013

Exploration at Don Antonio

Las Cuevas

Mexico, the land of silver, is also host to lesser-known but still highly valued asset: the world’s largest fluorite mine, Las Cuevas. Fluorite (CaF2), a jadecolored, non-metallic mineral, is used in a range of industrial applications including refrigeration and the production of cement, semiconductors and steel. Growth in the emerging markets has increased demand for the mineral. Although China is the world's largest fluorite producer, domestic Chinese demand largely exceeds its production. Las Cuevas itself produces 420,000 tons of metallurgical-grade and 580,000 tons of acid-grade fluorite every year. Mexichem Fluor produces just over 1.2Mt of finished products every year from three different mines and is the only fluorite company to be completely vertically integrated.

company Noranda Mines. In the 1960s, the political winds shifted and Noranda "mexicanized” the mine by selling 51% of participation. In 1968, Mexichem’s predecessor became involved in the mine and purchased all outstanding shares in 1986. But the history of the mine begins long before 1953. As the theory stands now, about 30 million years ago an emanation of hydrothermal fluid packed with

san luis potosí

Las Cuevas began operating in 1953 under the direction of the Canadian Global Fluorite Production & Reserves

Fluorite Production (Tons) 2011

2012

Reserves

China

4,700

4,200

24,000

Mexico

1,207

1,200

32,000

Mongolia

416

22,000

South Africa

240

220

41,000

Russia

260

150

Kenya

117

107

2,000

Namibia

3,000

Other Countries

496

470

116,000

World Total (Rounded)

7,520

6,850

240,000

Source: US Geological Survey

fluorite struck a seam of coal. While the circumstances surrounding its origin may be debated, the geological alchemy created a bulk tonnage deposit of highpurity fluorite: 300 meters wide, 800 meters high and 300 meters deep. Mexichem’s competitors produce fluorite concentrates with purity between 35% and 40%, while those from Las Cuevas consistently average 85%. Consequently, Mexichem counts clients like DuPont and ArcelorMittal among its ranks. Las Cuevas’ products cater to four main customer groups and include: steel, cement production, concentrate for the chemicals industry (30% of this is for the aluminum industry), and fluorocarbons. In 2010, the company bought the refrigerators business of Imperial Chemicals Industries. At the moment, Las Cuevas holds proven reserves of about 50Mt of fluorite at 85% purity, a figure that would sustain mining for the next 40 years. The mine life looks likely to increase by a few decades due to recent discoveries. Mining to date has taken place above the 300-meter level, yet an extensive exploration program has delineated a new deposit at depth, Don Antonio, with 20Mt of proven fluorite. Exploration will continue over the course of the year in hopes of increasing the resource in the future.

MARKET FOCUS

Community

relations More than a century has passed since the Cananea strike, in which Mexican mine laborers famously revolted against wages three times lower than those of their American counterparts. Mexican mining workers have achieved a great deal since then, yet distrust of the mining sector persists around the country. While mining has occurred for over 500 years in Mexico, certain states without a mining tradition—mainly Oaxaca, Veracruz and Baja California del Sur—remain resistant to mining. Each of these places has controversial projects on hold due to community and local government resistance. In May 2012, Goldgroup Mining’s Caballo Blanco project was refused environmental permits largely due to the antimining stance of the state’s governor, Javier Duarte Ochoa. In Baja California del Sur, another no-go mining state, Vista Gold’s Concordia Project stalled due to resistance against the development of a gold mine near the picturesque Baja coast. Mining companies operating in Mexico are familiar with anti-mining NGOs entering communities and spreading misinformation about exploitation and contamination to prevent projects. According to the country manager of one precious metals producer, the result of such activities is that communities “usually don’t want anything we offer; they just want money.” Even in areas with strong mining traditions, there are isolated incidents such as the community’s “24hour eviction notice” at MAG Silver’s Cinco de Mayo project in Chihuahua. In June, Minera Frisco began facing union labor stoppages at a handful of its mines. These incidents illustrate the need for communication and a proactive, rather than reactive, approach to community relations. Initial resistance to mining projects is typically something that must be overcome—once a project comes into operation communities come to understand the benefits of responsible mining. Since its purchase of Peñasquito in 2006, Goldcorp has brought about large changes in Zacatecas by creating wealth and building communities. In concrete terms, mining employs 330,000 people directly and another two million families rely on the sector indirectly. According to Camimex, salaries in the mining sector are 37% higher than the national average. Of course, community relations are problematic for mining companies the world over. Mexicans, for the most part, understand and support mining. The few incidents that do emerge are far less severe than those in Peru or Chile. “Obviously not all the states will be open to mining,” says the CEO of one silver exploration company. “But the mining tradition is one of the reasons we chose Mexico over any other country.”

Arturo Préstamo President & CEO Santacruz Silver

Sometimes the biggest challenge in this industry is working with local communities. It was initially difficult to get the community at our Rosario project on board, even though it’s a historical mining district. The turning point took place once they realized that we work with respect for the environment and people, while bringing large benefits. We are active in many community programs aiming to increase their quality of life. It was important for us to be open with them regarding our plans and ideas involving the project. When they see that you are being honest, they give you their vote of faith. Horacio Bruna Senior Vice President Goldcorp

A social license is an essential part of operating in Guerrero. The year I started at Los Filos, we had serious security issues. We reviewed operations and today it’s one of our safest mines. We work intimately with local communities and I’m proud to have witnessed the growth of these areas due to the mine. Mezcala and other communities grant us permission to operate. Before, they’d block the roads for whatever reason, but today they defend those same roads because their sons and daughters work in the mine. The entire family is part of Los Filos. Manuel Ortiz Monasterio Managing Partner ERM

There is no prior consultation process in Mexico. The only thing similar is the environmental impact assessment (EIA) process; members of the community who feel they will be impacted by the project have the right to request a public consultation. The process is managed by authorities, not the project sponsor. It’s very limited and very slow. By the time the EIA process allows for a public consultation, all the work has been done and the EIA has been submitted; it’s a fixed project and the conflict will have already begun. Ramón Dávila COO First Majestic Silver

Our priorities are sustainable development and good relationships in the communities where we operate. Nonetheless, I believe we’ll face more challenges in the future, so we need to know how to work well with communities. We could say that security is a challenge, but if communities don’t defend us then we won’t be able to work at all. Communities must feel they are part of the wealth we create. We need to find the way to tell them that a portion is theirs, so let’s keep working together. Mining Leaders

mining Equipment, technology & services

lead article

The New Alchemists I

n the mid-16th century, the Holy Roman Emperor Charles V issued the Leyes Nuevas, banning the enslavement of indigenous peoples— the Spaniards’ source of cheap labor—and throwing Spanish miners in Mexico into a productivity conundrum as silver production dropped while labor costs rose. Bartolomé de Medina, a Spanish metallurgist, noticed smelting had quickly turned uneconomical in the high-cost environment and developed a new method to process ores by adding mercury and saltwater, creating the patio process. Today, Mexico’s mining technology and services sector has abandoned de Medina’s experiments in alchemy, but the underlying principle remains: technology boosts productivity. For those looking to operate in Mexico, the sector offers a talented local pool of companies employing world-class technology. And just as the Spaniard de Medina brought his innovations to the Pachuca silver mines in 1554, today’s technology continues to flow into the country from abroad.

Photo: Cominvi

“There is large demand for cutting-edge technologies in Mexico,” explains Carlos Caicedo, general manager of the Swedish mining equipment manufacturer Atlas Copco. “Before, miners made decisions on price, but now the strategy is to buy the best technology because it will lower the total cost of ownership. Everyone understands the need for productivity.” In general, mining companies regard technology in Mexican mines as high-level. “Mexico generally has everything that mines have in Canada or Australia,” says Martin Subiria, director general of Weir Minerals Mexico. And Horacio Bruna, senior vice-president of Goldcorp, concurs: “Technologically speaking, [Goldcorp's]Canadian and US operations—of which I was in charge—fall behind Latin America. We used to joke it was dinosaur mining.” Mining Leaders

lead article

$170M is Saved from a 1% Productivity improvement —Andrew mackenzie, BHP BILLITON

clear: “For us, every 1% improvement in productivity translates into $170 million in savings.” With bottom lines suffering, companies specializing in hi-tech costcutting come to the fore.

“service hub model”, which has been utilized in mining hotspots including Antofagasta, Chile, and Arequipa, Peru. Metso’s engineers now work side-byside with Grupo México’s team to install the equipment, train staff and develop a safety culture. Buenavista del Cobre is not the only mine in Metso’s crosshairs, with the company set to target other major projects in the region.

One company, Metso, is known for crushing and conveyor technologies that contribute up to 30% in operational cost savings. Having opened a Mexican factory in the 1980s, the Finnish manufacturer of technologies for process industries considers mining key to its 34% average annual growth in the country over the last decade. In 2010, Grupo México enlisted Metso to assist in restarting operations at the world-class Buenavista del Cobre mine in Sonora. Metso decided that the Sonora, Mexico’s top gold and copper state, merited its

Sonora's capital, Hermosillo, has become the center of mining supply, as firms seeking to tap into the pipeline of projects being developed in the arid state establish a presence there. Among them, Japanese company Sumitomo Drive Technologies plans to open a plant in Hermosillo during the second half of 2013, to build gearboxes that power mine processes. Sumitomo caters to other industries in Hermosillo, but concedes mining was a main motivator behind the choice of plant location. Atlas Copco is also a neighbor, having opened

Photo: SPM Mexico's domestic drilling companies are one facet of a mature and diverse MTS sector

There's still room for improvement. Remote-controlled vehicle operation is not as widespread in Mexico as in Europe. Complete automatization is only present in a few of the country’s largest mines. According to many executives interviewed by Mining Leaders, Mexico’s commitment to technology will improve as the country develops more megaprojects. “The other Andean countries have more experience in megaprojects like La Escondida or Chuquicamata in Chile, or Yanacocha and Toquepala in Peru,” says Subiria. “Mexico has Peñasquito and Buenavista, but as the country finds megaprojects, there will be further propensity to adopt modern technology.” Now more than ever, innovation seems crucial to developing economical megaprojects. In the decade-long metal boom, highcapex megaprojects with big price tags were in vogue. Nonetheless, in 2012 the strategy unraveled in the face of high costs and volatility in metals prices. Global majors across commodities, including Anglo American, Vale and Barrick Gold, all saw write-offs and cost overruns, while in Mexico, Baja Mining’s El Boleo copper project stalled due to a cost overrun of about $250 million. According to Société Générale, approximately 50% of all projects are now experiencing capital cost overruns, largely the effect of a period where companies hunted volume growth no matter the cost. In this climate, according to BHP Billiton CEO Andrew Mackenzie, the solution is

Photo: MAQSA

$40,000 to $50,000 PER HOUR cost of a breakdown in a large mine a Hermosillo distribution center in late 2012. Though traditionally a provider to underground mines, the company has seen increased demand from new clients in the open-pit realm. While the most advanced technology originates overseas, Mexico offers a skilled corps of local contractors, builders and drillers who are quickly snapped up by the major producers. The local service offer evolved rapidly in the last decade. “Contractors were usually family friends of the miners and used secondhand equipment, which hurt contractors' reputations in general,” explains Rafael Villagómez Contreras, founder and director general of the mining contractor Cominvi. “But the situation today is much different.” Nowadays, Cominvi adheres to global standards, with the likes of their “new fleet policy” ensuring the purchase and deployment of a brand new fleet of Atlas Copco and Sandvik machines for every new contract. Besides pushing machinery standards, the sector is focused on safety and sustainability. BASF, the world’s largest chemical company, develops chemicals for use in mines. “Our products are designed to increase productivity, lower costs and speed up operations,” explains Jorge Antillón, a director. BASF is also committed to bridging green legislation gaps between Mexico and other jurisdictions. “There’s a mix of regulatory effectiveness and appropriateness,” says Antillón. “For emissions, regulations are more robust than Canada, but water regulations are relatively lax compared

to other countries. Our additives allow a higher level of purification than what exists in the market, yet regulations don’t mandate a more appropriate limit." Water use in Mexico remains contentious, especially when miners use water near agricultural areas affected by droughts. Even though Mexico's MTS sector is on par with the major mining countries, global demand for talent and spare parts has created bottlenecks. The metals boom created a global skills shortage and a surge in demand for specialized spare parts. According to Martin Subiria, “In large mines a breakdown can cost between $40,000 and $50,000 per hour, far more than the cost of the machine and much more than the spare part itself.” Companies are developing maintenance programs and parts warehouses. Even though Mexico has an established steel industry, high demand in Asia has created scarcities for some companies operating locally. Still, Mexico has an

advantage over other jurisdictions. “Mexican mining engineers are some of the best in the world,” explains the director general of a mining contractor. Yet, the industry needs to be promoted so young people are encouraged to study earth sciences and engineering. Without a sufficient supply of new talent, growth in the minerals sector will stall. Those looking to operate in Mexico will find a diverse and capable MTS sector. The centuries-old industry entered a new chapter when NAFTA took effect in 1994, making the country a skilled workshop for North America and the world. With strong infrastructure and human resources, Mexico now competes globally in terms of hi-tech efficiency. Miners here value technology’s role in efficiency and sustainability, and its effect on the bottom line will become increasingly important as Mexico introduces a new mining law and global metals prices grow volatile. Mining Leaders

q&a

Good Ralph Schweens President in Mexico, Central America & the Caribbean

Jorge Antillón Director BASF

Angel Sánchez Business Manager Performance Chemicals

Chemistry

Rising costs, water shortages and environmental contamination complicate mining across continents. BASF, the world’s largest chemicals company, has long provided miners with tailored solutions to these problems based on the geological and metallurgical characteristics of each mine. Ralph Schweens, Jorge Antillón and Angel Sánchez explain how BASF’s global approach to R&D and technology can lead to higher productivity in mines. BASF grew to be the world’s largest chemicals company by investing significantly in R&D. How is knowledge transferred from the Mexican mining sector to create new products at the global scale? Ralph Schweens: BASF is a German company, and we have R&D labs across the world because innovation is best achieved by sharing knowledge and experiences. In Switzerland we have an underground tunnel where we conduct tests that include spraying concrete and applying additives to reinforce and then test the strength of the rock. It’s practically a mine, and we develop and test many technologies for the mining sector. The transfer of technology occurs very nimbly within BASF. Technologies developed in traditional labs in Europe or the United States are later “tropicalized” via testing in local markets. Angel Sánchez: Besides this “tropicalization” of products, knowledge also flows from our mining clients in Mexico to our R&D labs abroad. BASF strongly emphasizes R&D for the benefit of our client; this makes a big difference. The majority of our additives are created specifically for a certain client’s activities, sometimes based on the particular metallurgy of a deposit. The lab that oversees mining-related R&D is in Tucson, Arizona, a US mining center with access to Canada and Mexico. This lab is developing lixiviates and flocculants for copper and gold extraction, and new products like foams and coagulants to be launched very soon to complement our extraction product line.

BASF had not been present and therefore complemented our worldwide offer. AS: At the end of March we combined the petroleum, mining and water divisions as a result of our M&A activity. The three divisions were combined administratively and in some cases technologically. Clearly, some materials for water treatment have very similar chemistry to the mining business. BASF, nonetheless, decided to separate the divisions to create independence. Today we’re trying to return to the original model and generate administrative synergies. The businesses continue operating in different ways with regional managers independent of the business line. Water is a critical issue for mines in Mexico. What technologies can BASF offer to recycle and purify water in processing plants?

BASF has recently acquired a series of chemical companies. What synergies have been generated from the acquisitions?

AS: Water can affect mining operations in different ways, so our technologies are targeted at providing a solution for all of them. Our main product is Magnafloc®. This additive is a flocculant designed to sediment solids in the mining process; it allows a higher recovery rate and purer level of water. On the other hand the LIX® range consists of solvent extraction reagents, which form water-insoluble complexes with various metallic cations. LIX® reagents are used for the extraction of metals such as copper, germanium, molybdenum, nickel and palladium. In metals like gold this is very important because you need to recover up to the last grain of gold. Thus, our additives are usually used in the final stages of processing, and are very specific to maximize recovery.

Jorge Antillón: The company’s M&A policies are to analyze the market and identify areas where we could complement our value chain by vertical integration. In 2010, BASF acquired Cognis, a deal that strengthened our R&D capabilities. Cognis was a large company that had developed solutions where

RS: Our water products also contribute significantly to sustainability and mine safety. Every day we ask ourselves: how can we make mines safer to work in? Most of our water treatment products are FDA-approved for human consumption. This requires a large investment on our part, but considering their

Schweens, Antillón, Sánchez

100%

of the BASF chemicals used during mine life are recovered without discharge

use, it is important that the products have this classification. Another important point is that our products are used in closed circuits, with no discharge into the water supply. At the end of a mine’s life, 100% of the chemicals are recovered and recycled without any discharge. BASF products are more efficient, requiring less use of additives, even if we’re talking about parts per million. This translates into low costs. Mexico’s environmental regulations are very thorough and can be stricter than those of the United States or Canada. How do you see them evolving in the future? AS: The environmental requirements are varied: in some cases they need to be more robust, but in other areas they need to be toned down. In the past, starting a mine was rather complicated; the government has worked on making the process less bureaucratic and more open to investment. I believe that, as a chemical company, BASF needs to be in close contact with the authorities to guide the future of regulations. Water regulations here are relatively lax compared to other countries. Our additives allow a much higher level of purification than what exists in the market, yet the legal limit isn’t as high as it should be. For emissions, the regulations are more robust than in Canada. There’s a mix in regulatory effectiveness and appropriateness. Our role as a chemical producer and developer of technologies is to lend our expertise to lawmakers so that sustainability will set off on the right foot.

BASF covers mining, construction and other important sectors from its new offices in Mexico City

seen as crucial for revitalizing the economy. The new president has six years to prove that the reforms work, so we’ll see if the results lead to stronger growth in mining and other sectors. AS: From my perspective, the labor issues won’t improve in the short run, but the government is trying to trim the red tape that can surround the opening of a mine. The government should promote consolidation of the post-extraction parts of the mining sector—especially metals fabrication and refining— which could add a great deal of value to the sector and the economy. Most of what we extract is shipped before being processed. This has value, but to convert it into an added-value good will multiply the importance of the sector. It’s not the same to sell copper and copper cable. Mexico is already number one in silver, but we need to develop a strategy around our growing copper production. With more direction and guidance, Mexico could become the third-largest producer of copper.

How do you view the new administration's political support for the mining sector?

What is the corporate strategy to expand BASF’s presence in the Mexican mining sector?

JA: Many industries, mining included, have labor issues with unions, which still wield a great deal of power here. The government pushed through a labor reform and an educational reform that have been controversial, but addressed an issue that had created bureaucratic inefficiency in the past. Many other reforms, including new finance and energy measures, are

RS: We are implementing an ambitious plan to grow. In recent years, Mexico has seen a strong mining boom, which I believe will continue despite the headwinds the sector faces. Commodities can suffer downturns, but many companies are continuing to invest, above all in exploration, in Mexico and Central America. Mining Leaders

Project focus

Cananea Service Hub Company

Metso

Ticker

OMX: MEO1V

Location

Cananea, Sonora

Development 2013

Installation of machinery at Buenavista del Cobre

Cananea Service Hub The vast Sonoran Desert’s gold and copper richness converges on the small mining town of Cananea, where local mining giants such as Minera Frisco and Grupo México operate large open pits flanking the east and west of the town. Cananea can now count Metso, a Finnish multinational process technology company, as a new neighbor.

Sonora is the top mining state where Grupo México, Peñoles and Frisco mine. Our idea was to have our people in one area to cover all the mines

Metso has been in Mexico since the 1980s with a plant in Irapuato ; during this time, it has worked closely with both Mexican and foreign miners. To expand its presence, it looked to the northwestern state of Sonora. “We were on site with 180 technicians to help Grupo México restart operations at Buenavista del Cobre after the strike ended in 2010,” explains Leif Lindholm, vice president of Metso’s Mining and Construction division. “Following the purchase of the comminution equipment for the new Buenavista plant, we decided to implement the Service Hub model to offer our best service over the life cycle

of Grupo México’s investments. We are 100% integrated with their workers and we aim to grow together.” Metso’s Service Hub model is not a new phenomenon— the company has successfully built similar hubs in Arequipa, Peru, and Antofagasta, Chile, where Metso engineers work on-site to build, optimize, and repair the process equipment at the mine.

Leif Lindholm VP Mining & Construction Mexico Metso

According to Lindholm, the decision to open the Cananea Service Hub aimed

Source: Mundo Minero

Sonora: Major Projects 1. La Herradura 2. Santa Elena 3. Cerro Colorado 4. El Boludo 5. Mulatos 6. El Ombligo 7. San Francisco 8. Lluvia de Oro 9. Buenavista del Cobre 10. La Caridad 11. Maria 12. Milpillas

1 8 3

12 11 9

cananea

7 2

Sonora hermosillo

5 6

to “add value via service by having our people in the area to cover all the mines in the northwest of Mexico, including Baja California.” From Cananea, Metso can also maintain a presence at Peñoles’ Milpillas copper mine further north. The Service Hub functions as a repair and assembly center. Service includes everything from normal repair jobs and installation of equipment to contracts that can include complete or partial operation of the plant on a cost-per-ton basis. Metso is investing heavily in health and safety, working very closely with mining companies to create a safety culture that will prevent all types of accidents. The investment has already created a strong culture of safety within the large Buenavista open-pit mine as well as with the Peñoles mine sites. While Metso’s products create safer mining environments, in Lindholm’s view, “there can be a good book of safety rules and procedures written, but if the workers don’t comply, there will be accidents. Therefore we focused on implementing this safety culture and improving the status quo.” Since the 1980s, Metso has seen average annual growth of 34% in spare parts and service. “It’s cyclical,” says Lindholm. “There can’t be 34% growth every year. But when miners invest, they invest for decades, so I am very optimistic about mining in Mexico. It’s the star industry.”

q&a

MODERN

FAMILY

Rafael Villagómez Contreras Founder & Director General Cominvi

On the wall of Rafael Villagómez’s office is a large landscape painting of the Guanajuato valley. He points to the family’s former El Cubo mine, and explains how generations of mining led him to found the mining contractor Cominvi. Though El Cubo has been sold, Villagómez is part of a new generation that is shedding the past perceptions of Mexican mining by emphasizing modernity, safety and technology. One of Cominvi’s original goals was to change foreign companies’ perception of Mexican contractors. How did Cominvi contribute to improving the sector’s reputation? The image of incompetence and cronyism between mine operators and contractors comes from a time when silver was trading at $4 per ounce. Contractors were usually family friends of the miners and used secondhand equipment. It was common for these contractors to spend three days a week working and four days repairing the equipment. This practice cost us as a sector, but Cominvi has done much to revamp the industry’s image. Today I can confidently say that Cominvi and our competitors are extremely professional. Mining companies would rather hire us to save them from investing in both a complex operational procedure and a fleet of machinery. Companies can then better use the money in exploration and leave the risk to the contractor. Cominvi led the charge in spreading the message to foreign and local miners that things have changed among mining contractors. Cominvi turns 11 this year. How has the roster of clients evolved over the years? We have grown significantly since our first contract with Endeavour Silver at the El Cubo mine. We came to Canadian attention when Gammon Lake hired us in 2005 to develop the Ocampo property (now owned by Minera Frisco). Today we are the leading underground contractors for both Canadian and Mexican majors. The Canadians we work with include Yamana Gold, Goldcorp, Endeavour Silver and First Majestic Silver, while our partners among the Mexican majors include Fresnillo, Peñoles and Minera Frisco. The company’s slogan is “Our People Are Our Strength.” What are your main initiatives to invest in your workers’ abilities? There is a big problem in retaining workers in the mining sector. We have 1,170 employees, and we have worked hard in creating a corporate culture that stresses personal and professional

development, along with loyalty to the company. Mine workers are known to leave in the middle of projects, which creates dead time that can be as high as 10 days. Our retention rate is 95%, the highest in Mexico. Cominvi’s workers see a future in the company and know that we are working toward a common goal. We’ve also worked hard to improve our safety standards by readapting the protocol from one of our clients to fit Cominvi’s operations. Today, around 6% of our staff are safety personnel. Nearly all mines in Mexico apply strict safety procedures. How is your fleet of underground machinery shaping up in 2013? We have a policy to renew the entire fleet every five years or 15,000 hours. Every time we start a new project we use new equipment. We now have 35 Scooptrams, 18 Jumbos, and for this quarter we are receiving 9 new Scoops and 7 new Jumbos. The used machines are either sold or kept in reserve. Clients are paying for time—that’s the most expensive factor in any sector. Through this policy we’ve been able to guarantee our machines will be moving at least 85% of the time. Cominvi turned down the opportunity to work in Brazil. Why did you refuse this offer and how do you plan to expand internationally? Two years ago Colossus Minerals invited us to work in Brazil. Although it was a lucrative proposal, it was also a risky venture because we were not familiar with the different culture or legal and fiscal frameworks. Our philosophy is to grow sustainably; there is no purpose to expand rapidly if it presents a large downside. There are currently plenty of opportunities for growth in Mexico, so we are focused on delivering excellent projects, instead of taking international jobs just for the sake of it. Our strategy is to enter new markets via existing clients, like Yamana and Goldcorp, that have operations in Mexico and abroad. Yamana Gold also invited us to work in Chile, Argentina and Brazil, but it wasn’t the right time for our company. Mining Leaders

Project focus

Hermosillo Distribution Center Company

Atlas Copco

Ticker Location

(SS: ATCOA)

Development 2013

Increase sales to open-pit mines

Hermosillo, Sonora

HERMOSILLO center Mexican miners have long been strong adopters of leading technology. To fulfill this demand, Swedish heavy machinery producer Atlas Copco arrived in Mexico in 1952, and survived the push during the 1970s and 1980s to “mexicanize” the mining supply chain. But in the early 1990s, Mexico firmly embraced free trade and solidified Atlas Copco’s niche in the market. Carlos Caicedo, general manager of Atlas Copco’s Mexican operations, is still bullish on the country's mining sector, and his firm has recently opened a new distribution center in Hermosillo to better serve the open-pit miners in Sonora. “We’re recognized leaders in under ground mining machinery,” says Caicedo. “But we’re seeing more orders for our large-diameter surface drilling rigs from big clients, such as Grupo México after their recent reopening of Buenavista del Cobre.” Atlas Copco’s underground equipment such as scoops

We’re known as providers for the underground industry, but in past years, higher sales to large open-pit mines like those in Sonora have meant locating ourselves closer to clients Carlos Caicedo General Manager Atlas Copco

and trams are ubiquitous in mines from Chile to South Africa, but open-pit miners will more likely turn to Atlas Copco for its market-leading rigs. Even as the open-pit line grows, Caicedo notes, “our underground products are also booming.” October 2012 marked the opening of the new Hermosillo center. Prior to this, the firm’s sales teams had to make regular and lengthy trips to the mines. “The idea was to

decentralize operations from Zacatecas,” explains Caicedo. “The Sonora region is already the top producer of gold and copper, and we certainly expect more growth, so we decided on proximity to our clients.” While the existing Zacatecas overhaul center remains the current operational center and distribution outpost for all underground products, the Hermosillo office will spearhead the open-pit products division. The Hermosillo office will play a big part in delivering advanced Swedish technology to miners in Sonora. Built in the United States, Atlas Copco products can be sourced quickly across the border into Mexico. Caicedo believes that “technology is uniform and very advanced at [Mexican] mines, both open-pit and underground.” Nonetheless, the Hermosillo office aims to raise the bar, creating more efficient mines. “The attitudes have shifted a great deal,” explains Caicedo. “In the past, mineral type determined the amount of technology purchased. Gold miners ordered the most advanced equipment, but now everyone considers the total cost of ownership.” With the Hermosillo office now fully operational, it’s up to Caicedo to ensure that the miners are the first to know about new products that lower the bottom line and maximize efficiency. As he says: “The trend may be downward in other markets, but in Mexico it’s very positive.”

box

IRON SCAM

The mineral boom in Mexico has not gone unnoticed by the country’s drugs cartels, who have identified a variety of ways to capitalize. Whether its extortion, kidnapping mining employees for ransom, running their own illegal mines, or mineral theft and sale on the black market, cartels such as La Familia Michoacana have taken advantage. The theft and sale of iron ore, for example, became so problematic that Mexico introduced a new permit system for iron ore exports. In 2010, a money launderer for La Familia, Ignacio López, was arrested for exporting the equivalent of $42 million in iron ore to China. López allegedly negotiated export deals with three well-known international companies present in Mexico. As a part of such deals, cartels often receive smelting chemicals allowing them to melt down and produce higher-quality gold. Mineral theft and sale also appeals as another method by which to launder money. And compared to tracing and detecting other illegal produce like narcotics, tracking and investigating mineral trafficking is a far more difficult proposition. Mexico’s most feared cartel, Los Zetas, are also aware of the advantages, setting their sights on Coahuila state’s lucrative coal industry. In October 2012, Mexican authorities eliminated the leader of Los Zetas, Heriberto Lazcano, not in the heart of traditional gang territory, but at a baseball game in the small mining town of Progreso. The former governor of Coahuila, Humberto Moreira, told Al Jazeera: "Heriberto Lazcano changed from being a killer, kidnapper and drug dealer to something still more lucrative: mining coal. That’s why he lived in the coal region.” Los Zetas allegedly infiltrated the state three years ago, procuring coal via their own illegal mines, or through extortion of artisanal miners. And apparently the cartel doesn’t struggle to find a buyer for the coal, Los Zetas walk away with a profit estimated to be as much as 30 times higher than their investment. Mining Leaders

100

company focus

Servicios Perforación México (SPM) Year founded

2010

Company type

Drilling services provider

Headquarters

Durango

Clients

First Majestic Silver, Pan American Silver

No. of employees

Servicios Perforación México In just two years, Servicios Perforación México (SPM) has made great strides and plans to conquer new markets. The company was formed in September 2010 in the state of Durango, and obtained an important early contract with First Majestic Silver at its Del Toro silver mine in Chalchihuites, Zacatecas. Since then, SPM has come to be present at all of First Majestic’s Mexican projects. By the end of 2011, SPM had already drilled 50,000 meters, and is now working with other major Mexican producers like Grupo México and Peñoles. Despite securing contracts with Canadian majors such as Pan American Silver, Luis Alberto

Mining companies want to minimize the residual impact of drilling sites and its easier to receive environmental permits with smaller rigs. Luis Alberto Rodríguez Robles Director General Servicios Perforación México

Rodríguez, SPM’s director general, still feels that maintaining a regular supply of work is an uphill battle for the company.“ The Canadian miners have a preference for Canadian drillers,” says Rodríguez. “But they may come

and seek a Mexican partner after a year or two of difficulties understanding the workings of the Mexican mining industry.” However, being a 100% Mexican drilling company does have its perks: besides understanding the terrain and business practices, “we can work in the 50° Celsius heat of the summer drilling season in Chihuahua,” jokes Rodríguez. The company now has eight drill rigs available for various jobs around the country. Rodríguez’s drills of choice are portable rigs, such as the Discovery I or the MP 1000, because mining companies prefer to work with machines that minimize environmental impact. “The portable drill rigs have opened many doors for us,” says Rodríguez. “Mining companies want to minimize the residual impact of drilling sites and it’s easier to receive environmental permits with smaller rigs.” Responsible operations are integral to the ethos of SPM. Apart from low-impact drill rigs, the company requires training courses for each of its 60 workers, and implements a meticulous maintenance program on each of its rigs. “Our clients are Canadian, thus we meet their high standards and then exceed them,” says Rodriguez. Though Rodríguez prefers portable rigs, SPM can also mobilize heavy

101

40,000 meters Drilling booked for 2013

artillery for deeper drilling operations. The Titan I rig has the capacity to drill down to 2,250 meters, and Rodríguez plans to deploy it at First Majestic Silver’s La Encantada project in Coahuila, to drill deep down into a large iron-zinc-silver body below the 1,600-meter level. By the end of 2013 Rodriguez hopes to increase the number of drill rigs in the company from 8 to 15, maintaining a balance between lightweight portable rigs and heavy-duty machines. Of the eight rigs SPM operates today, one has been packed up and shipped to Peru for use with the base metals producer Volcan Compañía Minera. Rodríguez realized the potential for exploration growth in Peru while working there for a different drilling company. “Compared to Mexico, there is much more opportunity for drillers in Peru,” he says. “The sector is fragmented here and many companies are lowering their prices. We want to expand outside Mexico.” While the company is planning on enlarging its footprint in Peru, Rodríguez sees potential for growth in a handful of other Latin American countries as well. Colombia tops the list, followed closely by Brazil and, perhaps surprisingly, Argentina: “Argentina is even more open than Central America to mining.” Down the road, Rodriguez cites winning contracts significantly further afield in the copper belts of Zambia, as one of his major goals. By May 2013, Rodríguez had booked 40,000 meters of drilling for 2013, but he sees this number rising as more contracts become finalized. Since 2012, SPM has gathered pace, securing contracts with major Mexican clients, and wasted no time in setting its sights beyond Mexico in order to leverage the experience of its employees. “Come to Mexico,” says Rodríguez. “It’s a great place to invest and build mines, and we have the experience to help you out.” Mining Leaders

102

q&a

Enrique Ortega Nieto Director Servicios Hidráulicos del Bajío

There’s water down there

In 1991 Enrique Ortega Nieto had the idea of building hi-tech wells across Mexico and founded the Celaya, Guanajuato–based water drilling firm Servicios Hidráulicos del Bajío (SHB). With groundwater now an important issue for many domestic industries, Ortega explains that most “scarcity” results from inappropriate technology. SHB's use of the best drills has allowed it to find water in almost any place in Mexico. Water is a major problem for Mexico’s mining industry. How has SHB grown as water levels have fallen? Aquifers in some specific regions of Mexico were once plentiful and at equilibrium. However, due to the growth of population, industry and agriculture, there has been more extraction than recharge. This has encouraged the need for more advanced drilling technologies to reach deeper aquifers. I have always placed great importance on traveling abroad to meet with specialists, which has helped me bring the technology back to Mexico. At SHB, we closely understand the similarities between oil and water drilling, which has led us to change traditional processes. As is happening in the oil industry, we can see the growing need for deeper wells to supply the required water, not only for mining projects, but for the agricultural, industrial, bottling, food, automotive and pharmaceutical sectors. SHB considers the statement that “Groundwater can’t be found” to be a myth. What mistakes are companies making when looking for water? I am of the view that mines are not constrained by a real water scarcity, but by inadequate studies and incompetent well drillers. When someone drills the first well in an unexplored area and the well does not yield, everyone thinks the region lacks groundwater. The reality is quite different. Often the blame lies with a poorly conceived hydrological study, which, in combination with an artisanal drilling company with limited technology, results in the land being considered dry. Artisanal drillers without a technological background make inaccurate suggestions like drilling just 300 meters, when ample water might be located at 800 meters below surface. In such cases mining companies may end up with dry holes or having to drill many short-lived wells of limited supply. SHB can drill down to 2,500 meters. At what level do you usually find water in Mexico? It depends on many factors. In some places in Mexico a well of 100 meters is enough, but in others you need to drill 800

103

meters or 1,200 meters. In some cases we recommend drilling deeper than required to find new aquifers and sustain a large operation. In certain parts of the country, it is common to drill as deep as 2,000 meters for water. In any case, SHB's strategy involves using machinery with more than enough capacity for deep wells. Drilling deep also requires qualified personnel, equipment and additional technology working alongside drilling machines to reach depths without technical limitations. At SHB you claim to drill hi-tech wells. What are their characteristics and how is it done? A hi-tech well is distinguished by the equipment involved, its processes and construction materials—all technologically different from the ones demarcated by NOM (Norma Official Mexicana or Mexican Official Standard) for water drilling. The diameters of drilling bits are different while the performance of the well is more efficient and effective than an artisanal well. Hi-tech wells produce water volume correlating to the aquifer capacity, whereas artisanal wells are often poorly constructed and suffer many technical limitations, resulting in poor performance under difficult conditions. Hi-tech wells like the ones we build are made with materials that prevent corrosion and feature technology against subsidence collapses. These wells can also last up to 80 years depending on how sustainably managed the aquifer is, as well as the materials used in its construction. If these are efficient in pumping they generate short-, medium- and long-term energy savings, decreasing operating costs for our customers. Despite the precarious standard of Mexican water wells, since 2009 SHB has had the capacity to build up deficient projects to international best standards. This specialization has enabled us to supply clients at world-class companies. Although Mexican regulations do not require such high standards of us, we provide them nonetheless. Many of our customers are multinationals and we must achieve international benchmarks.

company focus

Compañía Isdamar Year founded

1983

Company type

Road construction, blasting, earthmoving, tunneling & drilling services

Headquarters

Hermosillo, Sonora

Clients

Grupo México, Minera Frisco, Goldcorp, Coeur Mining

No. of employees

400

Compañía Isdamar Hugo Meave Flores President Compañía Isdamar

The company operates a fleet of about 60 machines, including 10 Hydra-Trac drills and 24 Caterpillar 740 trucks. In Meave’s opinion, one of the main challenges is determining exactly how many machines to keep in the fleet, because downturns in mining means machines stay parked on the sidelines. In the future he foresees expanding the fleet by 10%; however,

for him the uncertainty over a downturn in the sector is too high to purchase more machines now. “The objective is to rent,” he says. “Our machinery is very specialized so it can take nine months to source and import a machine.” With Isdamar's work guaranteed for the next two years, Meave wants to go back to his roots as a gambusino. By the end of 2013 Isdamar should boast its own gold mining project in Sonora. Having worked in mining long before the wave of foreign investment began, Meave notes that many other construction companies have bid for mining projects without really understanding the sector. Isdamar, on the other hand, helped create the large open pits in Sonora, the country’s top gold- and copper-producing state, long before foreigners grasped the full potential of the mining business in Mexico. Sonoran Gold Production (kg) 1995–2013

3000 2500 2000 1500

Source: Inegi

1000 500

Mining Leaders

13 20

10 20

07 20

04 20

01 20

Compañía Isdamar had already existed for nine years when Mexico first permitted foreign investment in mining in 1992. Since then Isdamar has grown so rapidly that it had to begin prioritizing clients. “We work with Goldcorp at Los Filos, and then they invited us to work at Peñasquito, but the job was beyond our capacity,” explains Meave. Isdamar is now blasting and transforming the terrain at seven projects around Mexico, all of which are mines in production. Isdamar has moved 20.9 million tons of earth via rotary drilling. The company is fully booked through 2015; two of the projects on which it will begin work in 2013 are also Minera Frisco mines: Ocampo in Chihuahua and Porvenir in Aguascalientes.

Our philosophy is to give the best service. I ask the clients for the day and hour they want a job completed, and we always finish on time

Compañía Isdamar, the Hermosillobased earthmoving company, focuses exclusively on the mining industry. Its founder, Hugo Meave Flores, graduated from the Universidad de Sonora with a degree in Mine Engineering and then became a gambusino, panning for gold in the Sonoran Desert. The work was hard but rewarding, and after a couple years, in 1984, he went to work as a contractor at Minera de Cananea. Cananea still remains Isdamar's focus today; both Grupo México and Minera Frisco have contracted the company to work at the town’s Buenavista and Maria copper mines.

104

company focus

DNA Mining Year founded

2012

Company type

Power generation & automation EPC

Headquarters

Chihuahua

Clients

Agnico Eagle, First Majestic Silver, Coeur Mining

No. of employees

350 permanent; up to 2,500 during projects

DnA Mining

DNA Mining may be only one year old, but its two parent companies, Demek and Autronic, leverage more than 20 years of experience in power generation and automation. Though the company’s specialty lies in engineering and construction, it can call on five other sister companies—COPACHISA, EMYCSA, SPEC, DKfire, and Prinsus —to offer services spanning structural and civil engineering, earth movement, fire protection and renewable energy. “The idea was to create a complete EPC company for the mining sector leveraging our wide range of services beyond Autronic and Demek, for companies coming to work in Mexico,” says director general José Alfredo Heredia Navarro. Both Autronic and Demek have completed jobs in 17 Mexican states and 19 countries around the world. Since 1999, the two companies have been strategically allied with FLSmidth as a contractor in six different countries.

José Alfredo Heredia Navarro Director General DNA Mining

The company's forte is mechanical engineering, power generation, and automation. DNA Mining fulfill's miners energy requirements in two stages. First it can leverage Demek’s engineering and installation specialty to design the system, perform budget studies, and continue through procurement and construction. Once the infrastructure is built, DNA Mining can turn to Autronic to automate and optimize the power systems. Heredia has overseen the construction of both 155,94

142,75

133,54

121,19

137,33

102,64

95,48

84,85

63,35

60,21

52,27

120

72,15

160

117,83

Average National Price of Electricity 1999–2012 (Mexican cents/kWh)

113,79

200

power lines connecting mines to the Federal Electrical Commission (CFE) and onsite power plants. In this area it has worked on some of the most important mining projects in Mexico including Coeur Mining’s Palmarejo, Agnico Eagle’s Pinos Altos, and Grupo México’s Buenavista del Cobre.

The idea was to create a complete EPC company for the mining sector leveraging our wide range of services beyond Autronic and Demek

40 0

105

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Secretary of Energy

Having worked with Mexico’s largest mining companies, Heredia is proudest about the work done on First Majestic Silver's La Parrilla, where DNA designed and then installed five kilometers of 115kV lines between the CFE and the mine, a 7.5MVA reducing substation, and all the instrumentation and control for the project located in the western Altiplano about 65 kilometers southeast of Durango. Despite work with major companies, DNA Mining aims to provide advanced-stage juniors with conceptual engineering and construction services. At the same time, Heredia sees a huge opportunity to optimize and automate at the projects already in operation. Under Heredia’s “attack plan,” DNA Mining is reaching out to companies with projects in development across Mexico, but is also expanding across the hemisphere. The company is in talks to enter new alliances in Argentina and Chile. DNA Mining’s name is new, but the experience of its parent companies is known at home and abroad. “It’s a basic strategy,” explains Heredia. “We leverage advanced technology to move forward.”

box

A Breath of Fresh Air

The energy challenges Mexico presents for the mining industry are no secret, with energy provision accounting, on average, for 40% of a mine’s operating costs. With many mines located in remote areas, connecting to a power source is often an obstacle to a project’s economics, and much of eastern Mexico is still not connected to the national grid. The Federal Electrical Commission ranks the country’s solar and wind energy potential at 45 and 71 gigawatts respectively. Yet, while many mining companies in the region are resorting to alternative power supplies, few have pursued renewable energy. It is likely this will change dramatically in the medium term: Mexico’s wind energy sector, currently ranked the world's 20th largest, is the fastest-growing in the world. It’s only a matter of time until renewable energy becomes cost-effective for mining companies. Indeed, both Grupo México and Industrias Peñoles are looking at wind power. In 2012, Peñoles, was able to source 20% of its energy requirements from renewable sources. Its main project in the renewables space is the 330 kilowatt-hour wind farm in the aptly named La Ventosa, in Oaxaca state. Nearby, Grupo México is building 37 turbines, which are expected to generate 74 megawatts once completed in the second half of 2014. Miners also have an eye on solar energy. Though the generative capacity may be lower, miners are using photovoltaic cells for specific applications. Minera Frisco has installed photovoltaic cells in its Chihuahua and Aguascalientes operations. It’s said that if two 25–square kilometer areas of solar panels were built in Sonora and Chihuahua, they could supply Mexico’s entire power needs. And companies operating in these states are beginning to take advantage of the bountiful energy. Seven companies, including Agnico Eagle and Hochschild Mining, have installed photovoltaics at their mines. Martifer Solar is currently building Latin America’s largest photovoltaic plant in Baja California Sur, with a capacity of 82 gigawatts per year. The industry may balk at the current cost of renewable energy, but as prices become more reasonable and environmental standards more stringent, the situation will surely change. Mining Leaders

106

Project focus

Permex Mazapil Company

PERMEX S.A de C.V

Location

Mazapil, Zacatecas

Development 2013

Drilling for Goldcorp, Peñoles & Frisco

Permex Mazapil “In the 1970s we could drill down 70 meters and find plentiful ground water,” explains Hugo Gutiérrez, founder of Permex, the Guadalajara-based water drilling services company. “Then, as time passed, 100 meters began to be considered extreme. Now we routinely have to drill down to 400 meters.” The availability of water can make or break a project, as miners operating in Mexico’s arid regions are painfully aware. Since 1969, Permex has worked primarily with mining companies in the hunt for water across Mexico. At the end of 2012, the firm inaugurated offices in Mazapil, in northern Zacatecas. Among the mines Permex works with is Peñasquito, Goldcorp’s flagship project, which has been hit especially hard by a water shortage. Permex has been working at Peñasquito for seven years, even before Goldcorp became the owner. “We drilled 114 holes

Water is essential for all life, and we’ll continue to find it like we have for over 40 years

Hugo Gutiérrez Founder Permex

over three years, and we thought the job was finished,” says Gutiérrez. “Little did we know, the situation was only just beginning.” As geologists arrived at a better understanding of the Peñasquito deposit, the water requirements grew rapidly, finally culminating in 35 million cubic meters annually. According to Gutiérrez, although the Peñasquito region may be a desert, its geology holds water at a depth of around 500–600

Source: Guevara-Sanginés, 2006

Overexploitation of Mexico's Aquifers

Overexploitation: Current extraction is 1 to 2 times greater than the recharge rate Severe overexploitation: Current extraction is greater than 2 times the recharge rate

107

meters beneath a layer of limestone. Geologists refer to the hydrogeological formation below as the espalda de cura, or the priest’s back. Permex is currently awaiting the decision to go ahead with 45 more holes —to break the priest’s back. The drilling could be nixed if Goldcorp accepts an alternative plan to transport water 150 kilometers from Saltillo, Coahuila. But Gutiérrez remains confident that Permex will win the contract, as transporting the water poses severe technical and political challenges. The Guadalajara office has now become an empty nest, after the majority of the company’s 15 rigs and 140 employees moved to the new 2,500 square meter operation in Mazapil. Every year Permex drills about 20,000 meters, and now the majority will come from projects around Zacatecas. Other mines near Mazapil, including Minera Frisco’s Tayahua and Goldcorp’s advanced-stage project Camino Rojo, are also in Gutiérrez’s eye. The mining sector drives business growth for Permex, and every year the company has to continue drilling deeper in light of the water shortages that plague every industry in Mexico. “Our record hole is 900 meters and there is still no consciousness for conservation in the country,” he says. “Water is essential for all life, and we’ll continue to find it like we have for over 40 years.”

MARKET FOCUS

WATER According to the National Water Commission (Conagua), the western borders of Veracruz and Oaxaca states form the division between the arid and fertile zones of Mexico. In a country where water is the most challenging issue for miners, the contrasting water level between territories is illuminating. According to Conagua, the water availability in arid Mexico comes to 1,724 cubic meters per person annually, compared to 13,097 cubic meters per person in the fertile southeastern part of the country. Unfortunately for miners, Mexico’s geological wealth is concentrated in the country’s arid states. Though the government has proposed infrastructure projects to transport water from the southeast, nothing has ever materialized, leaving miners to develop their own solutions to find water sources. Drilling and pumping groundwater is the most straightforward option, but with groundwater levels receding it's becoming more difficult every year. Goldcorp’s Peñasquito mine made headlines for the water shortage that reduced its production. With three companies already onsite drilling into the aquifer, other suggested solutions include a 150 kilometer aqueduct from Saltillo, Coahuila. Even if the companies find water, conservation and plant efficiency are crucial factors. Processing a ton of ore in Mexico requires on average 1,056.8 gallons of water, of which 951.12 gallons are recovered. Since 2007, water prices have increased 23.77%, lending truth to the old saying: agua vale más que oro.

Hugo Gutiérrez Founder Permex

The mining areas of Mexico have the strictest water issues. The north is dry while the south has too much water, and the lack of rivers complicates the situation further. Projects were due to be built to transport water north, but the investment was too high. Peña Nieto's inauguration manifesto made no mention of water projects. However, in March he prohibited private drilling of wells. No new holes are allowed, so it’s getting harder to find water. Thus it’s necessary that the mining industry conducts a proper study and makes the best use of the available water, which won’t require permits.

Miguel Rangel Founder IDEAS en Agua

Ten years ago, mining companies did not focus on water sustainability, resulting in millions of gallons of water wastage. Today, reuse of water is arguably one of the industry’s most important issues, as it is essential for sustainability of land, but also your balance sheet. Even the best deposit in the world becomes economically unfeasible if you can’t supply the water. Many mines spend large sums of money to transport water over long distances. Water costs depend on each state, but there have been price increases recently because of rising demand from agriculture and mining, along with lower supply due to drought.

Armando Escarcega Senior CSR Manager, Zacatecas Minera Peñasquito

Sustainable use of water in mining is based on maximizing the relationship with the environment, through investments that reduce consumption and boost recirculation as much as possible. Today, with water scarcity, it's fundamental that miners adopt a sense of conservation when processing minerals. At Peñasquito, Goldcorp has had some success in each phase of hydrogeological exploration, but they're now working to reduce total usage. The company has managed its government relations well in regards to permitting, but has also selected companies with the best sustainability practices in deep-well drilling.

Mining Leaders

108

company focus

Weir Minerals Year founded

1871

Company type

Engineering

Headquarters

Glasgow

No. of employees

9,000

Weir Minerals

According to Martin Subiria, Weir Minerals’ director general, 90% of his company’s performance derives from mine maintenance. “There are mining operations in which one hour of downtime is worth more than the total value of our machine; in large mines it can cost between $40,000 to $50,000 per hour.” It’s for this reason that Weir puts such emphasis on maintaining and servicing its equipment. Should anything go wrong, the company ensures that both a fully-stocked inventory and the expertise required to solve any hitch are available near the mine. Weir is currently building a new 8,000–square meter plant to add to its existing service offices in Querétaro and Chihuahua. This rate of expansion has become typical of a

Our relationship with each project is like a long-lasting marriage: we’re there from the moment of union until the day of the mine’s closure Martin Subiria Director General Weir Minerals

company that has grown 400% since arriving in Mexico four years ago. The firm engages mining companies in the engineering phase, when a mine’s flow charts are being developed. Through close cooperation, the miner and Weir ensure that the project takes

hermosillo

chihuahua

durango

Enginering offices Service offices HQ & Factory

109

monterrey

querétaro

full advantage of the company’s product portfolio. Once the parties reach an agreement, Weir heads to the mine to check everything is installed correctly. “Our relationship with each project is like a long-lasting marriage: we’re there from the moment of union until the day of the mine’s closure,” says Subiria. Weir currently has a presence at some of the country's large, world-class mines and also in the development of several medium-sized silver projects. The firm uses both the Warman and GEHO pumps. The former are used throughout the mining process, from grinding to waste management. The latter are specialized, high-pressure pumps used for higher percentage solids. While there isn’t much demand for GEHO pumps in Mexico, Subiria suggests they could be useful in deep, subterranean mine workings to reduce the cost of dewatering to the surface. “Mines always have some type of water problem: many in Chihuahua have lots of groundwater, and energy costs to dewater can often be prohibitive.” What impresses Subiria about the mining industry in Mexico is the speed at which technology has changed: “With the country’s strong mining tradition, together with the technological advances multinationals bring, Mexican mines are in the same class as any number you’d find in countries like Australia or Canada.”

q&a

Time Machines

Héctor Neira Operations Manager MAQSA

MAQSA distributes more than 20 machinery brands across agriculture, construction, infrastructure and mining in Mexico, supplying heavyweight miners including Pan American Silver and Minera Frisco. Héctor Neira, the firm’s operations manager, discusses the challenges of mining in Chihuahua and Mexico, outlining MAQSA’s strategy for reducing down time and avoiding production delays when miners’ machinery fails. Your clients rent or buy your equipment. Which do you recommend? What do gold and silver explorers generally buy? First, whether a company rents or buys equipment totally depends on its financial health and the duration of its project. We generally sell to clients working on long-term projects, for reasons of cost-effectiveness. For example, we worked closely with Minera Frisco in renewing its transport mining fleet at a cost of around $30 million. We usually rent to clients with short-term projects who do not need to make such substantial investments. The most important aspect for our clients to consider is how often will they be using product, because idle machines waste time and money. We also offer different financing options, with competitive interest rates of approximately 6.5%. Gold and silver explorers in Chihuahua need all the usual equipment, from excavators to bulldozers, but do not usually require the largestcapacity equipment. The gold mines here are smaller than in other states such as Sonora, where grades are lower. So in Chihuahua we sell 100-ton and 150-ton trucks, compared to the ultra-class, 400ton trucks used in Sonora or at the large copper projects. To what extent do delays cause miners problems when it comes to transporting or servicing machinery? It only becomes a problem when demand outweighs supply. A few years ago, when juniors were acquiring financing much more easily, we saw a spike in demand for machinery that tested our logistical operations. Most companies supplying machinery to clients try to minimize delays for spare parts or new machines by forecasting demand three months in advance. Obviously forecasts could prove incorrect, but it does help to prepare. At MAQSA or any of our subsidiaries, we have a support service with spare-parts trucks traveling daily to and from clients’ projects. If a client in Monterrey needs a spare part and calls me by 4pm, he will receive the product by 11am the following day. In more remote areas repairs may take two days or a little longer. In cases of emergency we transport spare parts by air, but this is seldom required because we stock 95% of spare parts locally.

What challenges do your clients face in Chihuahua and across Mexico? The major problem in Chihuahua is the lack of water sources. Whether in the exploration or production stage, miners need water; many clients often talk of the substantial investments needed to connect their projects to water sources. Moreover, state security is an issue. We have never had machines stolen, but we have had staff members threatened with violence. Across Mexico, the mining industry suffers from a shortage of skilled workers such as geologists, technicians, and explorers. The government must do more to build mining schools and develop partnerships with leading institutions to create a high-skilled workforce. Furthermore, land ownership is not well-regulated in this country, which often leads to owners overvaluing land and dissuading mining companies from investing here. What are MAQSA’s plans for 2013? In Chihuahua we already have 72% of the market share, with clients spending an average of $5 million per year on our equipment. But we are looking to grow nationwide. We have just launched a strategic plan to create substantial growth within the next two years. We are aiming to double our 2010 revenues by 2015 and expect most of this increase to come from mining projects. Mining now comprises 45% of our client revenues, infrastructure and construction 35%, and farming and industrial the remaining 20%. Eighty percent of our revenues come from Caterpillar sales or rentals. We hope to improve our technical support service further by reducing maintenance times and developing our machine-diagnostic techniques. We also have a training center that develops the skills of 180 technicians and engineers every month. The same center is also used to assist clients in improving their understanding of our products. They can practice in our advanced simulators and take theory classes on sophisticated operational techniques. Mining Leaders

110

company focus

Grupo Sincom Year founded

1985

Company type

Catering, facilities management, camp construction

Headquarters

Chihuahua

Clients

Agnico Eagle, Goldcorp, Coeur Mining

No. of employees

900 (1,300 by end 2013)

GRUPO SINCOM

It’s fitting that before moving its headquarters to Chihuahua, Grupo Sincom was founded in Ciudad Delicias, the City of Delicacies. The catering and facilities management company has garnered over 30 years of experience in Mexico. Sincom's original focus were maquiladoras (manufacturing centers) until Gammon Lake—now Grupo Frisco—called in 2006 to ask for a quotation. Seven years later, mining now makes up 50% of the company’s business—equivalent to providing 17,500 plates of hot food per year to hungry mine workers. “Before Sincom became involved in mining, my only notions of the industry came from stories my grandparents told me,” says Rodolfo Loya Pineda, the director general. “Mining didn’t exist on the scale and level of sophistication it does today.” The arrival of Canadian mining companies has proved a boon for Loya.

Mexico needs to reduce the level of poverty; the mining industry’s contributions to infrastructure and education in these areas are crucial for development Rodolfo Loya Pineda Director General Grupo Sincom

Today he counts Agnico Eagle, Alamos Gold, Goldcorp, and Coeur Mining among his main Canadian clients. According to Loya, Goldcorp is his firm’s largest contract, with Sincom responsible for managing the facilities and feeding the 500 workers at the El Sauzal mine in Urique, Chihuahua. Sincom also provides catering and facilities management services to Mexican miners, including Industrias Peñoles and Grupo Frisco.

Grupo Sincom's presence in Chihuahua BISMARK / PEÑOLES

CHIHUAHUA GASODUCTO JUAREZ - CHIH / GSP CONCHEÑO / FRISCO

LA INDIA / AGNICO SONORA CIENEGUITA / DIABRAS

111

SAUZAL / GOLDCORP

Besides bringing food to the table, Sincom also builds mining camps. It specializes in constructing low-impact lodgings at mine sites, with the different kinds of buildings including multi-panel, portable, or insulated canvas dwellings. Through an alliance with Grupo Metal Intra, Sincom offers easily transportable “floating floor” accommodations that sit on stilts and minimize environmental impact. Coeur Mining hired Sincom to build the camp at Palmarejo when operations started in 2009. Due to the high costs of working with companies in exploration, Sincom does not directly cater the juniors. Sincom has focused intently on developing the skills of Mexican workers and boasts a large human resources department that has fine-tuned its training programs over nearly three decades. The firm trains local staff to provide a level of service comparable to industry standard in Canada. “I am very proud to serve the mining industry because it operates in marginalized parts of the country that others dare not enter,” explains Loya. “Mexico needs to reduce the level of poverty; the mining industry’s contributions to infrastructure and education in these areas are crucial for development.” While Sincom operates throughout Mexico, it is looking south to expand in the future, and is in talks to make acquisitions in El Salvador, Guatemala and Uruguay.

box

MythClusters

Since 2011, the mining cluster model in Mexico has gained traction as an avenue for stimulating economic growth. The design behind the clusters is simple: each cluster consists of the major mining companies, service providers and state governments—creating a forum to build a network of local suppliers and bridge the gaps in the supply chain via development at state level. Zacatecas spearheaded the cluster model in 2011 with a comprehensive member roster including mining companies such as Fresnillo, Minera Frisco and Goldcorp; government representatives including the local Secretary of Economy and Fifomi from the federal level; two local universities, Universidad Autónoma de Zacatecas and ITESM; and, finally, the service providers: FLSmidth, Atlas Copco and Emerson Process Management. The Zacatecas cluster is organized into the following committees: supply chain improvement, human development, safety and environment, investment attraction, and R&D. In its first year, Zacatecas attracted suppliers by showing the state's strengths and courted new suppliers through a communications campaign. Chihuahua launched its cluster in March 2013 with similar goals. It counts miners such as Agnico Eagle, Coeur Mining, and Hochschild as members, along with different levels of government and educational institutions. “Camimex may unify the sector nationally, but the clusters are a beneficial forum for mining at the state level,” says Luis Alba Solís, director of mining for the Chihuahua state government. The cluster aims to satisfy the needs of local miners while creating jobs and investment all down the mining supply chain. “Some of the miners are importing consumables from places as far away as Holland,” explains Alba. “Chihuahua is going further than Zacatecas by building a network of suppliers so that the miners consume what the state produces.” With Sonora state planning to launch its own cluster this year, the model appears to be gaining momentum, but mining companies will be waiting to see if Chihuahua can attract similar top international suppliers and service providers to invest and hire workers. Mining Leaders

112

MTS roundup MINERAL SAMPLING

SATELLITE COMMUNICations

Marco Barragan Country Manager, Minerals Bureau Veritas

Eric Cataño Director General GlobalSat

Bureau Veritas has the widest coverage of any geochemical testing firm in Mexico, with sample preparation labs in Caborca, Hermosillo, Chihuahua, Durango and Guadalajara. There is growing demand from juniors and producers for analysis, metallurgical testing and inspection services for international trade. Currently we send prepared samples to our analytical labs in Vancouver and Reno; the process takes up to three weeks. However, with rising demand and a greater emphasis on speed of results, we expect analytical resources in Mexico sooner rather than later.

SHAFT SINKING

DIGITAL MAPPING

Oscar Gaviño Founder Grupo Necaxa

Alberto Ramírez Mexico & Caribbean Manager Maptek

Our experience in civil engineering and construction gives us access to a greater range of jobs than the typical drill and blast. Our specialty in mine shafts, in particular, gives us a plus very few possess. Miners prefer hiring contractors with robust finances. They look for the use of modern machinery and high safety and maintenance standards. All of these are key policies at Grupo Necaxa. We have a full fleet of Atlas Copco machinery and highly specialized shaft sinking equipment that is hard to find anywhere in Mexico. We’ve worked with Grupo Peñoles for over 40 years and our current clients include First Majestic Silver, Mexichem and Fresnillo.

113

Of GlobalSat’s five satellite networks in Mexico, one is dedicated almost exclusively to mining clients. We provide video conference, telephone, Internet and data transfer services for mining clients operating up to 400 kilometers off the terrestrial communications grid. We guarantee the quality of the services we deliver; all of the equipment we use is operated by us in Mexico, so we can configure it to the needs of the client. We work with many of the biggest firms in the mining industry, such as Goldcorp, Yamana Gold and First Majestic Silver, among others.

Mexican mining companies have a growing interest in using technology to increase productivity. Maptek Vulcan is the world’s premier 3-D mining software solution for all stages of the mining life cycle. Vulcan has been used and trusted by mines worldwide for more than 30 years. By using Vulcan, miners can build a mine plan while exploration companies develop a geological model, all in 3-D. Maptek specializes in the research, development and application of 3-D laser scanning technology. Our products streamline common surveying tasks and deliver accurate results, making a difference in cost when in the field.

MTS roundup SAFETY EQUIPMENT

RAW MATERIALS

Tjerk Raske Country Manager Dräger

Federico Forastieri General Manager SSAB

Camimex provides recommendations to miners and should be credited for emphasizing mine safety. Its newest initiative is Norm 23, which mandates rescue shelters in mines. Safety in Mexico has seen major improvements: in fact, just 317 mine fatalities occurred in 2012, a lower figure than in the United States. We specialize in equipment such as portable gas monitors, self-rescuers with up to 60 minutes of autonomy, rescue shelters and respiratory equipment for firstresponse teams. Our portable breathing equipment for mine rescue workers can provide up to four hours of breathable air.

There are similar products on the market, but Hardox performs 30% better than typical quenched and tempered steels. The objective of Hardox is to achieve lighter and more durable machinery that enables higher productivity, longer usage and lowers overall ownership cost. The mining industry typically uses Hardox with a hardness of 500 Brinell, but SSAB offers a 600 Brinell hardness option for extremely heavy-duty usage like truck beds. Our factory in Mobile, Alabama, ensures fast delivery times of around 12 weeks to the Mexican market.

voice communications

HR Training

José Luis Apan General Manager Motorola

Patricio Apablaza General Manager Sandvik Mining

MotoTRBO, our digital two-way radios, enable miners to benefit from extremely clear and reliable voice and data communications inside mines. The technology has achieved much success in Chile and Peru, and we aim to extend our client base in Mexico. Large mining companies understand the need for instant communication to maximize productivity. Thus the adoption of digital technologies has been rapid, especially in the northwest of the country. Moreover, we foresee growth across the rest of Mexico as miners continue to seek solutions that improve productivity and safety.

The major challenge facing the Mexican mining market is human capital. Sandvik has responded by offering tailor-made solutions to its clients, which might include customized staff training programs. Sandvik Mining Mexico is also part of the firm’s global technical training program, which locates talent in local universities. So far, a quarter of our technical staff have graduated from this program. The rigs and equipment entering today’s market feature high-end technology, and familiarity with these products opens up many employment opportunities for our staff, both at Sandvik and beyond. Mining Leaders

114

Company focus

Ascendum Maquinaria Mexico Year founded

1959

Company type

Volvo construction machine & equipment distributor

Headquarters

São João da Talha,Portugal

Clients

Grupo México, Goldcorp, Peñoles

No. of employees

ASCENDUM

No one could accuse Volvo’s newest distributor in Mexico of lacking ambition: Ascendum Maquinaria México is aiming to take its revenues to $100 million by 2015. Already operating 5 offices in Mexico, the company expects to open a further 15 by next year. “Mexico is a great location for us to expand into, with a sustainable GDP growth of 3%–4% per annum,” says Ascendum Mexico's CEO Marco Liz. “We hope to take advantage of the significant private and public sector investment in infrastructure over the next few years to grow.” Ascendum Mexico is part of Ascendum Group based in Lisbon, Portugal, and founded in 1959. The Group has broad experience in construction equipment. The company sells, leases and maintains integrated equipment solutions to its customers in five countries across three continents. Mining companies, whose projects can sometimes last several

115

We must open our new offices as quickly as possible. I cannot expect to sell 10–15 machines in Zacatecas if our nearest local office is in Mexico City Marco Liz CEO Ascendum Maquinaria

decades, represent 15%–20% of its clientele. These long production timelines create strong demand among miners for high-quality new or secondhand machines with low maintenance costs. Another 50% of Ascendum’s clients are in the construction sector, which increasingly prefers leasing and renting with an option-to-purchase alternative. Ascendum is working to increase brand recognition for Volvo in Mexico, where

the company’s presence remains relatively modest; it aims to sell 200 machines in 2014 to gain a market share of 4%–5%. The company’s planned expansion should help it get closer to potential new customers and take it closer to this target: “We must open our new offices as quickly as possible to strengthen our geographical mobility around the country,” says Liz. “I cannot expect to sell 10–15 machines in Zacatecas if our nearest local office is in Mexico City.” The company believes its competitive advantage lies in the added value of the maintenance services it offers. “We expect our machines to be in constant use on challenging terrain. Keeping them in good repair will require at the very least a monthly service, of which 70%–80% will be carried out onsite,” explains Liz. ‘We also have a large spare parts inventory to ensure clients can expect to have broken or idle machinery fixed and working again within 48 hours.” Most of the company’s machines already incorporate advanced technologies such as onboard cameras to improve driver awareness, and highsuspension mechanisms that allow vehicles to travel with heavy loads at high speeds without tipping over. Ascendum will rely on advanced technologies like these and its pre mium maintenance service, to achieve its ambitious goals and grow alongside the Mexican mining sector.

q&a

detecting

deposits

Jesús Herrera President & CEO Detectores Exploraciones

Detectores Exploraciones offers geological and cartographic support to mining clients. Since 2005, the company has grown fivefold and company President Jesús Herrera expects this growth to continue at an annual rate of 10%–15% over the next five years. Below he discusses the security, infrastructure and policy challenges now facing miners in Mexico, and Camimex's successful program for combatting skilled worker shortages. To what extent are security issues your main challenge in Mexico today? Security issues in this country are often exaggerated and sensationalized by the international press. We work all over the country and our only problem to date has been the theft of two trucks in a narcotrafficking zone. A bigger problem is working in areas with little infrastructure like the Sierra de Guerrero, where we've sometimes had to walk 12–18 hours with our equipment, as there are no suitable roads. Chihuahua is also similar: the lack of transport infrastructure there has forced us to move equipment by helicopter.

environment and communities. Mining occurs in rural areas that are typically very poor and underdeveloped. The industry brings many benefits to these areas and subsequently creates a culture of sustainability through educational programs.

You say you are a wide-ranging mining services firm. What are your main areas of activity? Our principal business activities focus on geological and cartographic services, but we also help companies with concessions applications, whether it be applying for permits or getting geologists on the ground. We work with juniors and major producers such as AuRico Gold, First Majestic However, our main concern for 2013 is the mining law Silver, Goldcorp and Impact Silver, among others. Many changes—introducing royalty taxes for the first time—that are of our private company clients are Canadians who began likely to be passed this year. At present, we are already in a investing heavily in Mexico in the 1990s after delicate position with the highly publicized NAFTA was introduced. We also work with security issues, so introducing a royalty runs "We have over 25 the Mexican Geological Service (SGM), which the risk of scaring away investors. If this geologists who carry out often contracts our geologists because they happens, I believe it must not exceed 2% exploration, detecting mineral frequently suffer from skilled worker shortages or we risk losing international investments. resources, building resource in this sector. There is still much to be debated and the estimates and assisting in entire sector will be watching Mexico's Could you elaborate a bit more on the magnetometrics." legislature this year. geological and cartographic services that Detectores Exploraciones offers? Mexico doesn't suffer the same skilled worker shortages in We have over 25 geologists who carry out many tasks including the mining sector as Peru or Colombia. Why is this the case? geological exploration, detecting mineral resources, building Camimex, the Mexican Chamber of Mining, runs a program resource estimates and assisting in magnetometrics. However, that focuses on attracting students to the disciplines of cartography is currently our most in-demand service and we geology, metallurgy and mining. It also has a $1 million fund create around 10,000 square kilometers of new cartographic that supports scholarships for the brightest students entering information every year. We use advanced 3-D mapping these sectors. However, we must not become complacent; I technology, which offers our clients and investors the chance believe we need to increase professors’ pay and encourage PhD to analyze mineral deposits and location topography in clear students to gain more practical experience, rather than relying detail. Although we normally work with project-specific on pure theory. There is a lingering negative perception of the cartography, like a potential mine site, we also offer large-scale mining industry that affects new students entering the sector. mapping. For example, we have cartographic data on the whole Without minerals many industries would not exist. Thus we of Mexico on a 1:250,000 scale and another more detailed map need to support growth in the sector while protecting the that covers 35% of the country on a 1:150,000 scale. Mining Leaders

116

consultancy, financial & legal services

117

lead article

StReaMING

AhEAD L

ining the walls of Carlos Slim’s Museo Soumaya in Mexico City are handwritten stock certificates of Cornish mining companies from post-independence Mexico. In the 1820s, local investors were keen to buy shares of foreign companies operating in Mexico, yet today mining stocks more commonly appear on museum walls than in local banks. “I don’t see a market in Mexico for miners,” says Enrique del Bosque, a partner at RB Abogados. “There’s no interest in buying shares.” And reliance on external capital remains a major obstacle for miners operating in Mexico, explains Horacio Bruna, Goldcorp's top brass in the country: “Financing comes from north of the border because New York is the center of the financial universe, while Toronto runs mining.” Certainly, the major exchanges have been subdued and financing remains below 2012 levels. According to PricewaterhouseCoopers, 2012 saw nearly $1 billion of mining financing cancelled on the TSX, a steep rise compared to the $380 million written off in 2011. During 2012, mining companies raised $10.3 billion between the TSX and TSX-V, of which $1 billion was destined for companies with assets in Mexico. “Compared to 2012, we are seeing about 20% less capital raised on the TSX and the TSX-V in the first half of 2013,” says Carlos Espinosa, Head of Business Development– Mining Americas for the TMX Group. “That said, there are lots of filings in the pipeline, making us optimistic for the second half of the year. In 2014 we won’t be back to normal, but hopefully we’ll feel that the markets are on the right path.” Mining Leaders

118

lead article

Mariachis promote the Mexican Stock Exchange to investors in New York in May 2013

In 2012, the Bolsa Mexicana de Valores (BMV) was the top bourse in terms of capital raised in Latin America, beating its São Paulo rival, BOVESPA, for the first time since 2003. Growth was so dramatic that the exchange required a new mainframe 300 times faster than its predecessor in order to handle 100,000 transactions per second. Despite the global interest in trading and listing on the BMV, miners number relatively few compared to other sectors. In fact, the only metallic miners trading on the BMV are Mexico’s big five: Fresnillo, Grupo México, Grupo Frisco, Minera Autlán and Mexichem. Many ask why a nation with such a long mining pedigree has insufficient local demand for shares in the sector. Goldcorp briefly floated the idea of a local listing, but is unlikely to pursue it. Other producers including First Majestic Silver and Alamos Gold have also studied a BMV listing. And while there have been discussions on possible dual-listings between the BMV and TSX, nothing has yet materialized. Of the 200-plus companies with Mexican assets trading on the TSX and TSX-V, equity is a genuine option only for those with strong exploration projects, or producers focusing on productive assets. “A couple of years ago, the markets were seduced by highcapex projects,” explains Arturo Préstamo, president and CEO of Santacruz Silver. “Now investors want low capex and high-grade deposits.” Santacruz raised $40 million in February 2013, one of few companies able

119

Photo: Mario Tama

to sell shares in Toronto this financial year. Torex Gold led the pack, raising $380 million in October 2012. Like Santa Cruz, Torex has a high-grade deposit and competitive capital costs at its project in Morelos state. This reflects investors' new preference to value present cash flow over investment potential. “We’re seeing a gradual migration away from price/ net asset value (NAV) multiples to more cash flow–dependent valuation metrics”, says Sam Lee, managing director with CIBC's mining investment banking team. While some companies look to equity, debt remains an appealing option for many miners. Globally, interest rates are at historic lows and the cost of debt financing looks favorable for future growth. Canadian miners issued a total

of $16.5 billion in debt during 2012. Among the larger Canadian producers in Mexico taking on debt is Goldcorp which sold $1.5 billion in debt in March 2013, and New Gold, which increased its long-term debt profile to $847 million in 2013 from $252 million in 2011. Mexican companies also see debt as a favorable option in the current market. In October 2012, Minera Frisco issued $1.1 billion in debt to acquire the Ocampo mine from AuRico Gold for $750 million. “Debt is at interesting levels, and that’s why we could use the remaining funds to refinance some short-term debt at attractive rates,” says Alejandro Aboumrad, CEO of Minera Frisco. “There’s a large debt market, and it’s not exclusive to mining. Mexico could finance much growth using cheap debt.”

Global Mining Equity Financing Trend 2012 (C$ Billions) 10.3

2.1 1.0 TSX/TSX-V

ASX

LSE/AIM

0.7 NYSE/ NYSE MKT

0.3

0.4

Oslo

Other

Source: Gamah International, 2012 YTD December, compiled by Toronto Stock Exchange

lead article

61.3

2004

55.2

40.3

109.2

104.6

177.4 Source: TMX Group

85.7

118.6

118.5

210.0

Number of transactions (Millions)

189.1

Volume (C$ Billions)

191.3

182.9

Number & Volume of TSX Transactions, 2004–12

103.6

96.1 82.5

82.0

64.2

2005

2006

Metal streaming and royalties have grown rapidly in popularity and profitability, and in the last two years metal streaming companies have outperformed juniors. The model is globally consistent—being largely devoid of the operational risks that plague mining companies. Some of Mexico’s largest mines have engaged royalty streams to finance development. The strategy is to raise money via royalties on by-product metals. FrancoNevada, the world’s largest gold royalty company, has streams at Coeur Mining’s Palmarejo mine along with New Gold’s flagship asset, Cerro San Pedro. Palmarejo exemplifies the motivation behind producers entering royalty agreements: upfront capital for byproduct metals. Palmarejo is primarily a silver mine, but management decided to stream half of annual production until it reaches 400,000 ounces. Following Coeur’s example, Goldcorp will con tinue to stream 25% of production of Peñasquito's main by-product, silver, to Silver Wheaton for the rest of the mine's life. This follows an upfront payment of $485 million from Silver Wheaton in 2007. “Metal streaming is far less risky than debt, if you don't yet understand your real cash flow potential,” says Arturo Préstamo. “It's seeing growth now because many companies need to enter streams or close shop. It’s easy to raise money from streaming by-product metals.”

2007

2008

2009

Beyond traditional avenues of finance, sovereign wealth funds and private equity lead the charge in finding assets that miners are keen to sell. According to Sam Lee, “a common strategy involves acquiring exploration and development assets, de-risking them over a period of time, then selling to a strategic company or monetizing via an IPO.” As reported by Preqin, a private equity research and consultancy firm, eight private natural resources funds dedicated to mining raised $8.5 billion in 2012, more than from 2006 to 2010 combined. “There

$48

billion Value of mining assets now up for sale globally are European, Asian and other Latin American investors looking to invest at the project level in Mexico,” says Mauricio Candiani, founder of Candiani Mining, a boutique mining-sector investment bank. “A Korean conglomerate initially bought 30% of Baja Mining’s El Boleo, triggering the rest of the required project finance.” That said, about $48 billion of mining assets are now up for sale as commodities enter a bearish cycle, more

2010

2011

2012

than double the $23 billion of completed and pending deals in 2012. Interest in selling is turning heads, and for many buyers, valuations are very attractive. “I’ve seen more M&A activity in the first half of 2013 than I did a year ago,” says Mitchell Krebs, president and CEO of Coeur Mining. In April 2013 Krebs finalized Coeur’s purchase of Orko Silver for $382 million, outbidding First Majestic Silver to close the deal. Two stories will play out in the M&A world this year. First, majors with rising costs and write-offs are selling their noncore assets. “They’re trying to get away from megaprojects that blew them out of the water,” explains Rob McEwen, chairman and CEO of McEwen Mining. Meanwhile, McEwen says, “juniors are flat on their backs” and desperate for funding. Juniors with advanced-stage assets like Orko might still find buyers to move development ahead, but earlierstage companies must consolidate or die. In 1846, during the Mexican-American War, Cornish mines were expropriated to Mexico. Today, miners need not worry about political risk—a factor that ranks Mexico a notch above many other jurisdictions. Resource stocks may be down, but once they rebound, those of Mexican miners will likely outshine many of their competitors to grab investor attention. Mining Leaders

120

q&a

Rick' s

Rick Rule Chairman Sprott Global Resource Investments

Pickings

As chairman and founder of Sprott Global Resource Investments, Rick Rule has accumulated a wealth of expertise in the natural resources sphere. For Rule, the political changes in Mexico are unfortunate, but the global mining sector faces a much larger challenge: financing. Rule explains how companies operating in Mexico are faring compared to other jurisdictions. Why have there been so few major discoveries in the mining sector in recent years? The mid-1980s discovery cycle was the consequence of an exploration focus in Nevada. It took us 10 years to unlock the resources there. And the great discoveries in the early part of this century in places like Peru were a result of political liberalization and our ability to employ modern technology. In my experience it takes around 10 years of focused exploration before geologists become familiar enough with the terrain to produce the mature datasets that lead to significant discoveries. I would suspect that we are on the cusp of a discovery cycle, but I cannot say with any certainty until it’s in the rearview mirror. Do you expect any major silver discoveries in Mexico, in the future? Absolutely. The best place to look continues to be along the silver belt in west-central Mexico. Despite prospecting with very primitive technology, the area has still yielded a huge proportion of the world’s silver. And it’s only in the last 10 years that new silver exploration has started. The Spaniards found the resource through dumb luck, and up until the 1960s that was essentially the case for us, too. When Mexico liberalized its mining legislation, most foreign companies looked for historic, unconsolidated and undercapitalized Mexican mining districts, rather than pursuing new exploration. Even MAG Silver’s Juancipio deposit wasn’t discovered due to remarkable technology, for example. However, due to technological improvements, the success enjoyed by MAG will be repeated many times over. Recent discoveries, such as First Majestic Silver’s La Parrilla mine, lead me to believe that Mexico is on the verge of several discovery cycles. Has a lack of technological sophistication in the mining sector made governments less reliant on foreign expertise? It would be wise for the sector to rely on private investment from their own countries, but due to sociological rather than technological considerations. Community relations are an increasingly important issue, especially in Latin America. Historically, the continent’s capital cities have reaped the

121

benefits from mining, while the regions have borne the costs. For example, the current regional resentment to mining in Peru is understandable, because mining revenues have not been equitably distributed within the regions. In Mexico, such resentment can be tackled far more effectively by domestic mining companies than by foreign firms, as the former possess a more nuanced grasp of the country’s political and social realities. With regard to technology, we are just now beginning to see a resurgence in development, which has particular significance for Mexico and Latin America as a whole. One of the technologies that will be very useful in Mexico is astral imaging and spectral differentiation technology, which is currently being used by Almaden Minerals. This allows companies to identify faults, intrusions and alterations from space, reducing an area of 2,000 square kilometers to the 2 or 3 prospective kilometers with resource potential. So while it’s historically been true that technological aspects of exploration have lacked, the future holds a great deal of promise, especially in regards to arid terrain. What is your response to Mexico’s proposed mining royalty? The introduction of a mining royalty would be unfortunate. The stable, formal employment offered by mining companies to the rural population contributes significantly to diminishing the recruitment base of the drug cartels. Mining drives narcotraficantes out, and to jeopardize this with the introduction of a 5% royalty would be shortsighted. Because resource prices have continued to escalate, governments are becoming more prone to resource nationalism. What constrained Mexico from exploiting its resources for so long was the government’s hostility toward private exploration. We only have to juxtapose the current strides Mexico’s mining sector has made with the atrocious performance of the state-owned oil company, PEMEX, to see this is the case. The wealth of a country should be distributed equitably, but in order to unlock this wealth, resources must first be commercialized. States need to be supportive of this process, or they will risk repeating the mistakes that led to the current reality in Venezuela.

RICK RULE

80%

of juniors are essentially redundant

Mexico's arid terrain is ripe for technology-led prospecting

Which countries are the most attractive to the mining industry? Five years ago I would have said Chile, no question. And we still love Chile; we are treated fairly, the datasets are fantastic and the rule of law is stable. If a company has a dispute with the government, it can sue in Chilean courts and prevail. This isn’t even possible in the United States, never mind other parts of the world. However, right now I like the look of the genuinely frontier markets that may seem too risky to others. For example, we’re active investors in Nicaragua, and have been treated very well. We would also like to get involved in Bolivia: despite its internal problems, it’s an underexplored and resource-rich country. Mexico is also very appealing: it has its share of problems—including uneven power delivery, social unrest and a rural education deficit—but its excellent mining legislation, well-developed infrastructure, large middle class and educated workforce cannot be overlooked. Conversely, the United States is becoming an unappealing country for mining. The industry is far less integral to American culture and many Americans are openly hostile to it. The political risks of mining are therefore much greater in America, and for similar reasons Canada, than in Mexico. How does the current down-cycle compare to others you have witnessed? First, the issuers in this cycle seem unusually reticent about taking equity financing even when it’s available, which may be a consequence of raising a substantial amount of capital between 2002 and 2010. But I remember the desperation with which issuers sought equity during the 2000 down-cycle. From my point of view as a check-writer, those conditions were preferable to now. I want to take advantage of the current situation but can’t write checks with beneficial financing terms, particularly in comparison to the earlier cycle.

Will we see a shift in the way mining is financed on the TSX-V? It will change dramatically. For the last 10 to 15 years the sources of financing on the TSX-V have been publicly traded open mutual and small hedge funds run by generalists. And they have made absolutely catastrophic mistakes. The new sources of capital will be through sovereign wealth and private equity funds. Another source of financing for juniors will be larger mining companies. It is far cheaper for Newmont or Rio Tinto to commence exploration via a joint venture with a prospect-generating junior than by themselves. We will also see less Western banking and multilateral financing taking place; these will be replaced by bank financing from emerging and frontier markets, like ICICI Bank in India, or the major Chinese or Middle Eastern banks. Their incentive to participate in resource financing will stem both from the profit motive, and also from a social mandate to increase access to resources that their societies need. What will separate the good junior explorers from the bad? There are roughly 3,000 juniors competing for a market which can support around 600. This means 2,400 junior companies are essentially redundant. The junior mining industry as a whole is highly overpopulated, undercapitalized and mismanaged. If every public junior exploration company in the world merged and formed one company, that one company would, in a very good year, lose $2 billion. In a bad year it would lose $10 billion. But around 10 to 15% of the juniors perform so spectacularly that they add credibility to the whole sector. Bifurcation of the sector will come as a consequence of market forces—70 to 80% of the issuers will lurch towards their intrinsic value, which is zero. The relevant companies, whose stock has been devalued by association with the lossmaking juniors, will inevitably begin to recover. Mining Leaders

122

q&a

A Change

Laura Cristina Díaz Senior Partner DBR Abogados

of Climate

Despite Mexico’s status as one of the world’s most favored mining destinations, insiders are fretting about possible disturbances to the status quo. Laura Cristina Díaz, senior partner at DBR Abogados, analyzes some of the issues now concerning miners. DBR Abogados is a mining-focused, Mexico City-based law firm whose clients include McEwen Mining, Coeur Mining, Cayden Resources and Nyrstar Mining. Miners across the country are worried that Mexico will introduce a general royalty. Why is Peña Nieto’s government, widely regarded as pro-business, considering this measure? In the previous government, there were several strong attempts from the left to introduce a royalty in Mexico’s house of representatives. This is not a new phenomenon: I’d even venture to say there is a lingering “Spanish syndrome” in Mexico, with the role of conquistadors in the popular imagination being filled today by foreign mining companies. Even Mexican companies are facing stiff resistance. Governments at all levels are desperate for more money to create social programs and mining is a potential source of funds for these. Under the proposed mining law, we realize that the government's role will be greater, and that royalties will likely become a reality very early in the current government’s term. It may even be discussed in the next congressional session. In the last 20

In October 2012 one of the first proposals championed by then-president elect Peña Nieto was a controversial and wide-ranging labor reform. How will this reform affect miners? Overall the reform benefits both individuals and corporations. Before, we had only two kinds of work contracts: temporary and fixed. As some of Mexico’s highestpaying employers, mining companies know the risk of this dichotomy. Most people that work in mining come from mining families and they understand the industry, but the unions cause headaches by asking for more and more. The reforms are good for everyone except the unions because they lose independence and benefits.

Iron ore is more regulated and faces years, many stricter export requirements than other minerals. How did the iron industry How would a general royalty impact concession holders have used come to be more scrutinized? Mexico as a place to raise competitiveness in the mining sector? The Secretary of Economy, in conjunction Even if the congress does levy a royalty, I money rather than really run with the tax department, requires a special believe Mexico will be fine, if slightly less a business. But that era is over export permit for iron ore because of past competitive. The royalty itself matters less now—those who do business instances of clandestine mining. Iron ore than the government’s message about what here will always be back. saw one of the largest booms in the last it wants to do for the country. Mexico offers couple of years due to strong demand from much more than other Latin American Asia. This fueled the creation of small countries, including: stable exchange rates, low inflation, good mines in Jalisco, Michoacán, Colima and Sinaloa, where iron infrastructure, a wide range of service providers and qualified ore was mined without appropriate government licenses. professionals. I’d say it’s fair to levy a royalty if it is funneled In the past it was common to see large boats loaded with directly to the communities involved in the development of iron ore of dubious origin leaving Manzanillo and the other mining projects and infrastructure, but not a royalty as high Pacific ports. The iron ore industry imploded, forcing the as 5%. Certain royalties already exist in Mexico. The Mexican government to enact the strict export permit requirement. Geological Service (SGM) charges fees and a royalty of Securing a permit is now very difficult—companies must between 2% and 3% on properties when they tender projects operate with transparency and at the highest standard. for development—the government could seek a similar figure, We worry that we might see this permitting requirement minus taxes, for businesses that generate jobs and FDI. repeated for other metals in the mining sector.

123

Laura Cristina Díaz

What kind of environmental penalties could a mining company face from Semarnat if it were accused of polluting?

In the last year, miners have seen growing resistance from local agrarian communities. How will this theme likely evolve?

To moderate and control the impact of mining on the balance and integrity of ecosystems, companies must of course abide by the environmental regulations applied to the processing of both minerals and waste. There are severe penalties for noncompliance with environmental legislation, which is why mining companies must obtain the appropriate permits to operate. There are a whole host of fines, temporary suspensions, closures and other consequences for companies that operate without permits and environmental licenses. Thankfully in most cases foreign companies meet their obligations and given their experience in other jurisdictions where environmental legislation is even stricter, operate according to international standards. Clients strictly adhere to two types of regulations: those concerning environment and also explosives. We don’t see many exceptions to this—this firm has 50 mining clients and we haven’t had one instance of an environmental fine. If miners didn't care, Semarnat could close operations and firms would stand to lose a great deal of money daily.

It will be interesting to see if the government decides to give preferential rights to indigenous communities, such as the community in Jalisco. Another social group is claiming that central San Luis Potosí is theirs. While respecting and caring for communities is important, you can’t create preferential rights for people when the rights are not granted to others under the constitution. Sometimes the government tries to make it seem that everyone is happy despite the conflicts. I believe the new government has enough experience to protect the rights of concession holders because foreign companies usually play by the book and maintain rigorous standards. In the past you could get a mining concession easily; in the last 20 years, many concession-holders weren’t serious and used Mexico as a place to raise money rather than really run a business. But that era is over—those who do business in Mexico will always come back.

Mining Leaders

124

leader insight Carlos Espinosa Head of Business Development Mining Americas TSX

As head of business development for Mining Americas at the TSX and TSX-V, Carlos Espinosa has developed expertise spanning the southern tip of Latin America to Alaska’s northern point. While companies listed on the TSX were hit hard in 2012, Espinosa has noticed that dual-listing has given many companies a strong boost, and believes the market is on the way to making a slow but sure recovery.

DUal-listing

It’s incredible how trading on both exchanges skyrockets after firms decide to dual-list on the TSX. Dual-listing appeals strongly to companies because it not only gives them access to Canadian capital, but also opens up American and global capital markets. It’s for this reason that 34 companies have chosen to list on the TSX/TSX-V and the ASX; they have access to Asian capital markets through the ASX, and listing on the TSX opens up the entire northern hemisphere. Forty percent of daily trading on the TSX/ TSX-V comes from abroad—it’s a truly global exchange. But while duallisting undoubtedly can give a company a big boost, several factors must be considered when choosing which exchange to list on, including: the analyst community, the investor base, the company size and the industry. For example, the LSE is a great exchange for large-cap companies with assets in Europe and Africa, but Toronto is the place where smallto large-cap companies with assets in Latin America want to be listed. This is why some British companies with Latin American assets are listed on the TSX or dual-list on the TSX and the LSE: the analysts here are well known and well informed of the financial, technical, economic and political contexts of the Latin American continent. In addition, some exchanges are more active for dual-listing. In Latin America the best example is the Lima Stock Exchange (BVL), which has been developing a junior market. Currently, there are 17 mining companies duallisted on the TSX/TSX-V and BVL. For foreign companies with assets in Peru, the key challenge is integrating with local communities. Creating jobs

125

and contributing to the development of local infrastructure can all assist in the integration process. However, listing on the BVL creates stakeholders in the community and also gives foreign companies access to local capital. However, in Mexico, there is no junior market for the mining industry; therefore one of the best-value propositions to finance Mexican mining companies is the Canadian capital market, through the mechanism of the TSX-V.

There is no doubt that dual-listing can give a company a big boost, but it should consider several factors when choosing which exchange to list on.

In line with global trends, 2012 company performance on the TSX/ TSX-V was lower than expected and likewise, in 2013, is still slowperforming. Nevertheless, investors have unsurprisingly been far more cautious and adverse to risk. People are still investing in companies on the TSX, but they are selecting larger companies with steady production and reliable dividends. Normally the cycle for juniors on the TSX-V is marked by rapid upturns and downturns, but this time the downturn has been much longer and more protracted. People are far more nervous than in previous years. Consequently we’ve seen more private placements than is typical, as well as royalties and joint ventures, and we will likely see more acquisitions. Further, many officers have been reinvesting in their own firms, which is a good sign because it demonstrates that they have faith in their companies’ futures. It’s also a very good opportunity to invest. There are some stocks going for 10 or 20 cents, which may well rise to 20 cents, 50 cents or $1, within a couple of years. Of course, you must be very cautious with who’s behind the company, how much management is investing in the company, how much experience they have, and who’s on the board.

Project focus

SRK Consulting Company type

Consulting on geology, exploration, open-pit & underground mining & hydrogeology

Year founded

2011 (in Mexico)

Mexico offices

Hermosillo, Querétaro, Zacatecas Alamos Gold, Grupo México, Fresnillo, Minera Frisco, First Majestic Silver

Clients No. employees

11 engineers in Mexico

SRK CONSULTING While other mining consultancies still oversee projects in Mexico from abroad, 2013 will see SRK Consulting open its third office in the country. “We need to be located strategically in all the mining hotspots in Mexico,” explains Luis Arroyo, director of Mexican operations for SRK. “And Hermosillo is the capital of gold.” The Hermosillo office, opened in May, is the latest step in the company's rapid growth. Having opened its first bureau in Zacatecas during 2011, SRK then opened a hydrogeology center in Querétaro last year to advise on the persistent water problems across the country. Though Arroyo initially contemplated opening the first office in Mexico City, he opted for Zacatecas because SRK’s philosophy is to be located near its mining clients. Before opening its first local bureau, SRK had been working on Mexican projects from its North American offices for over 15 years. The decision was made because “SRK’s management understood Mexico’s importance to global mining,” explains Arroyo. SRK consults on issues from exploration to closure, yet the Hermosillo office will focus on exploration and geology. Given Sonora's dry climate, SRK also plans to staff the office with hydrological experts alongside geologists and mine engineers.

We need to be located strategically in all the mining hotspots in Mexico, and Hermosillo is the capital of gold. Luis Arroyo Director SRK Consulting Mexico

hermosillo

zacatecaS QUERÉTARO

on cost optimization. “I always say mining consultants have two functions,” explains Arroyo. “In bonanza times we help companies grow, and in crisis times we help them optimize.” With water costs especially high in the Sonora, SRK aims to optimize plants in order to achieve 80%–85% recovery of water. In the future, Arroyo believes that the focus of the Mexican offices will shift from away from exploration and geology and move toward optimization. At the moment, SRK employs 11 engineers among its offices in Mexico. Arroyo foresees increasing this number to 90 in the future. The company’s offices in Chile and Peru provide good examples of past success stories, and employ 138 and 150 engineers, respectively. In Arroyo’s opinion, Mexico will have a secure future as a mining country because it is the top producer of silver, a mineral that serves a role as both a precious and an industrial mineral.

In the face of rising costs, the Zacatecas center will offer many services focused Mining Leaders

126

leader insight Peter Gianulis President Carrelton Asset Management

Peter Gianulis was a partner at Saranac Capital Management, a $3.4-billion spinout of Salomon Brothers, before he founded Carrelton Asset Management in 2005. The firm took a focus on natural resources stocks and recorded strong returns between 2005 and 2010. However, as markets weakened, Carrelton turned its attention to private equity finance for mining projects. The firm aims to match private capital with undervalued projects across Latin America.

Private Initiative It’s often said that when it’s easy to raise money on the stock market, it’s a warning to get out. Conversely, the best investment opportunities occur when investors are shiest. As of May 2013, the combined market capitalization of gold and silver in major markets throughout the world—including the juniors, the intermediates and the majors—doesn’t surpass $240 billion, less than half of Apple. On the TSX-V, the combined market capitalization of precious metals is less than $4 billion, a minuscule amount. People forget that publicly traded markets are a function of supply and demand of capital, and do not reflect the fundamentals of individual stocks. Historically, the single biggest driver of stock returns has not been made on company earnings, but on the expansion of price-to-earnings ratios. During most of my career, mining stocks were trading at over 20 times cash flows; now it’s more like 6 to 7 times. We need a new approach. As a fund that has been long on metals, mining and energy stocks, Carrelton was hit hard by the recent sell-off. However, As a fund that has been long after a few bruises, we believe that the on metals, mining and energy real opportunities in this cycle are with stocks, Carrelton was hit hard private equity mining investments. by the recent sell-off. However, The current valuation gap between the fundamentals of junior gold and silver projects and their public valuation means we can cheaply acquire prospects from public companies and develop them with private capital. We believe that exploration and development projects should be held in private equity structure and only taken to market in production or late-stage development. Exploration firms must be nurtured, but market pressures for quick results and constant PR releases are not conducive to running a successful company. A publicly traded firm that discovers gold is likely to twin that hole by drilling immediately next to it, then send out a press release that catches investor attention. A private firm, however, would do step-out drilling up

127

after a few bruises, we believe that the real opportunities in this cycle are with private equity mining investments.

to a kilometer away, better defining its resource. To make matters worse, brokerdealers often commence shorting those stocks in advance of a private placement and then negotiate the private placement at a significant discount to the current market, diluting the share structure. The opportunity for private investors is to approach cash-starved public companies with strong projects and strike a deal for one of them. It’s a valuable approach, as the junior’s only other option would be a dilutive share offering. Carrelton is currently negotiating with around nine companies in Latin America on different projects. Mexico, however, remains our favorite, for four reasons.

First, the geology is well known. The best place to find a new gold deposit is next to an existing one, and in Mexico there’s less guesswork. Second, with a 500-year history of mining culture, you don’t need to convince people of a project’s benefits. Third, the country’s wealthy entrepreneurial classes, including Carlos Slim, have mining interests, making it a good bet that mining will remain in favor politically. Finally, the number of existing mines means that infrastructure is rarely a problem. The mining sector is clearly suffering, but I would like to remind people about Miami’s real estate sector in 2007–9, when prices in numerous suburbs plummeted by over 60%. In 2010 you could purchase a condo, rent it out, pay the mortgage and make a 10% return just waiting. The mining sector is similar: you can buy a gold mine, operate it and make a 20% cash-on-cash return, simply by waiting for gold to break out. I can’t be sure that private equity finance for mining will be a major trend in the coming years, but it offers the best return in the entire market. Carrelton is in a unique position—we already know where the hidden gems are in Latin America. We don’t need to learn about the sector; we just need to strike deals. We’re in the right place at the right time.

Destinations 2013-14 London • Hong Kong • Beijing • Australia Bringing together some of the most influential decision-makers within mining companies and the investment community, the hugely successful Mines and Money shows provide a platform where the best of mining and exploration can be showcased to investors from around the world. Recognised as the best international forum for networking in London, Hong Kong, Beijing, and Melbourne, the events are fixtures in the diaries of industry leaders. Whether you are a mining or exploration company seeking investors, or an investor seeking the next hot mining growth opportunity, Mines and Money has something for you.

Decembe r 1 – 5, 2 013 The Busin ess Desig n London Centre,

014 28, 2 24 – h ntion c r e Ma Conv tre, Kong en Hong hibition C g & Ex ong Kon H

To book your sponsorship or exhibition booth for 2013-14, please contact Pablo Martin • By phone on: +44 (0)7957 164107 / +44 (0)20 7216 6063 • By e-mail at: pablo.martin@minesandmoney.com 014 9, 2 16-1 Hotel, e n Ju orld ina aW h Chin ijing, C e B

Australia October 29 – November 1, 2013 MCEC, Melbourne

www.minesandmoney.com M&M2013-14_A4.indd 1

29/05/2013 15:56

leader insight Manuel Ortiz Monasterio Managing Partner Environmental Resources Management

In the last few years, the mining sector has experienced a number of community problems in projects around the world. Environmental Resources Management (ERM), an international environmental consultancy operating in 39 countries, argues that proactivity is better than reactivity, and earlier is better. With Mexico having seen its own share of community conflicts over the last year, Manuel Ortiz Monasterio, managing partner at ERM Mexico, details his preventive strategy.

Social Sciences

In Mexico, project permitting for all industries is subject to the environmental impact of the project in question. Social impact, on the other hand, is neither evaluated nor permitted for. Currently only the Secretary of the Environment and Natural Resources (Semarnat) can grant permits. In the future, I would like to see the Secretary of Social Development involved with Semarnat on permitting. Many sectors, especially mining, impact on society at least as much as the environment. If a company secures an environmental permit, it's sitting on a time bomb by ignoring the community. Companies tend toward a reactive response to problems, rather than a proactive and preventive approach. ERM has been able to work successfully with some of Mexico’s largest multinationals to manage their social impact proactively.

to address social issues. There’s a huge need for the growing mining sector to take a more proactive stance akin to international best practices, like those outlined by the International Council on Mining and Metals or the International Finance Corporation.

The short answer, without revealing the magician’s secrets, is that you need communication adequate to the ERM focuses on strategic social work instead of reacting when a conflict erupts. circumstances. Managers in the mining Our experience spans a variety of mining sector often find it very difficult to projects throughout Latin America. understand the inherent dynamism of We call it a social license to operate; social systems. You can’t complete a study If miners consider how much it’s a very tacit agreement because and use a few data points to monitor it will cost to resolve a conflict no such official permit exists here in community relations. Social systems after it erupts, it becomes the Mexico, but a mining project cannot constantly evolve, interests shift, and the obvious choice to begin the progress without it. Given that such balance of power changes. Companies process early. projects are geographically specific, must keep note of these elements and companies need to plan strategically adapt their communication to these changing circumstances. Essentially the and build positive relationships with theory of conflict management, like any their neighbors. A company can’t buy theory, is very simple: transparency and communication create mutually this through philanthropy or public beneficial relationships. Through the right communication and relationshiprelations—it requires nuanced human building schemes, such as investment instead of philanthropy, you can generate a development. This is the type of work return. It’s not a monetary return, but you’ll witness human development and receive that ERM does. a license to operate. If people feel this respect from the mining company then they will cooperate. No one likes to be in conflict—they’d rather have a peaceful coexistence. In Mexico we often get called in when things go very wrong. There are social We believe it is never too early to begin a dialogue with the neighbors of a management strategies and tools to mining project. ERM has designed community engagement strategies for some address such situations, but we’re more of Mexico’s larger mining companies to be used as early as their exploration limited as the conflict has already phase. In many cases it’s the first time a community has ever witnessed mining, erupted. Because permitting in Mexico so it’s vital to make a good first impression. If miners consider how much it doesn’t require any social assessment, will cost to resolve a conflict after it erupts, it becomes an obvious choice to we are usually only hired beforehand if begin the process early. clients have a global corporate mandate

129

q&a

BACK TO

Evy Hambro Investment Manager BlackRock World Mining Trust

BLACK

As an investment manager for BlackRock World Mining Trust, Evy Hambro brings a valuable perspective to the industry, with a career spanning 19 years. While the firm’s 2012 investments in two Mexican mining giants, Fresnillo and Industrias Peñoles, were one of the few bright spots in 2012, Hambro is adamant that the economic outlook for the mining sector is once again on an upward swing. Why did BlackRock’s Mexican investments buck the downward trend of 2012? We invested in two Mexican companies in 2012: Fresnillo, the world’s largest primary silver producer, and its parent company, Industrias Peñoles, Mexico’s largest mining company and producer of zinc and lead. Quite simply, the two companies are conservatively managed and have excellent exploration potential, not to mention their high production growth rates. And of course both offer very good dividends for shareholders. Mexico is a great place to do business for us, offering boundless potential through both its prospective geological endowment and promise of future discoveries. The country is an incredibly mining-friendly place to operate. Many gold and silver companies have underperformed in recent years. What are the reasons for the low evaluations of explorers and mid-tier companies? The mining sector has been affected by the breakdown in trust between investors and mining companies, because the latter have not delivered on their promises. Consequently, the overall rating of explorers and mid-tier companies has dropped across the sector. The problem has been even more acute for gold companies, whose management teams have been chasing production growth, ahead of growth in firm value. The practice of issuing shares to replace reserves or grow production has only added to the severity of the problem. What can we expect from the change in leadership that has occurred across the mining industry? Whether through forced or willing redundancy, the change in leadership has a high association with write-downs to many of the assets purchased or developed over the past few years. The leadership transition was particularly pronounced in the gold sector, with 5 of the 10 largest gold producers either changing or announcing a change of CEO over the past 12 months. The new management teams have

made various promises to address the perceived failings of their predecessors: pledging to reduce operating costs, curtail or delay capital expenditure entering new projects, and increase returns for shareholders. What gives you confidence that 2013 will be a better year than 2012? The main reason is that the uncertainty regarding the US and Chinese economies has eased significantly. The risks surrounding those two economies, which dominated the headlines for the past few years, have now abated. There had been concern over the potential for leadership change, but the reelection of President Obama, together with a smooth leadership transition in China, has provided markets with continuity. This has certainly been borne out in early 2013, as we’ve seen a very strong return from US equity markets, and confidence in Chinese economic growth has risen. Currently, we do not plan to shift in the weighting of our investment in commodities, and intend to stick with copper and iron ore over the next 12 months. While it is true that our exposure to iron ore damaged our portfolio in 2012, the market has begun to improve and our losses are en route to being recovered. What motivated BlackRock to enter into royalty deals with London Mining? We’ve always wanted to be in mining royalties and have tried many times in the past, but the prices we’ve been willing to pay have been below what the companies have been prepared to accept. The principal reason is that companies have had access to capital at a relatively low cost, due to the banking sector’s willingness to lend at lower rates. Now that banks aren’t as willing to provide finance to the resources sector, the value of opportunity has become greater for those that are willing to put capital to work. Royalties have always formed part of our investment remit, but now they’ve become a far more attractive proposition. Mining Leaders

130

lead issue

Adventures in Capital Raising Investors have little appetite for the stocks of mining companies on the local Bolsa Mexicana de Valores (BMV), where only four Mexican metallic mining companies are listed. Given such weak local demand, Canadian companies are absent from the BMV, while Mexican institutional and retail investors prefer to purchase TSX-listed shares of miners. But that doesn’t mean Canadian miners aren’t considering listing. Some producers with mines in Mexico want to list, not to raise money, but as a diplomatic gesture towards the local market. For the most part, finance for mining in Mexico originates in Toronto, and the market still faces headwinds there. Nearly half of the TSX’s 1,300 companies are surviving on $200,000 or less in working capital. A dual-listing arrangement between Canada and Mexico could stimulate investment, but four years of ongoing talks have yet to outline a clear path ahead. Now Mexico is in talks to join the Mercado Integrado Latinoamericano (MILA), a combined exchange between Chile, Colombia and Peru. If it becomes reality, this would most likely see an increased appetite for mining stocks. To avoid diluting their shares, miners are exploring alternatives to issuing equity. One attorney interviewed by Mining Leaders advised against miners trying to take a loan from Mexican banks: “Not even Carlos Slim’s Grupo Frisco can get money from the banks.” Metal streaming is a tested option in Mexico, and is used by companies such as New Gold, Coeur Mining, and

131

billion

in 2012

Raised on the TSX and TSX-V by companies with projects in Mexico

Goldcorp for mine development. Considering the low interest rates globally, debt remains a strong method for financing. In 2012, Canadian miners issued $16.5 billion in debt to finance their projects. Or as one CEO told Mining Leaders, “Bankers are calling me everyday and throwing money at me.” One option yet to be employed to finance the construction of a mine is capital development certificates (CKDs) funded by institutional investors. These have been used in other Mexican industries such as infrastructure, and many expect them to be used in mine development soon. The Bay Street mantra that good projects always find funding remains true. Despite weak financial markets, projects in Mexico have been able to raise significant capital on the TSX. Mexico hosts 201 companies between the TSX and TSX-V, which raised $1 billion during 2012. Highlights include Torex Gold raising $380 million and Premier Gold Mines $122 million. As exploration advances towards construction, miners will find legions of skilled bankers and lawyers to arrange the deal.

lead ISSUE Rob McEwen Chairman & CEO McEwen Mining

Enrique Del Bosque Founding Partner RB Abogados

The junior sector of the market is flat on its back right now. There’s uncertainty whether they’re going to get money. Most of the sector is in hiding. They’ve cut their exploration programs. They’re trying to cut expenditure. And I'd have to say the executives of those companies are trying to preserve their paychecks. So all discretionary spending is gone, and must wait for the cycle to return. The gold market is near the bottom. Now is one of the most attractive times to be buying gold stock: valuations are at historic lows.

Though the idea of dual BMV-TSX listings has floated around for years now, I don’t see a real market in Mexico for miners. Juniors face two problems: hostile takeover or zero appetite. Mexicans invest more in miners on the TSX than the BMV. Some very successful juniors have grown quite large and undertook a study to see the result of BMV listing. It was not encouraging, revealing no interest in buying shares in Mexico. Mexican brokerages are buying shares from exchanges worldwide, especially from the TSX, and selling them locally.

Fernando de Ovando Partner-in-charge Jones Day Mexico

Mauricio Candiani President & CEO Candiani Mining

CKDs are a new vehicle for institutional investment, basically pension funds, for instance. CKDs will not be used on highrisk development or early-stage exploration projects, as they need to prove financial returns in mining. They will focus on low-risk, mid- to long-term, mature projects with consolidated miners to generate market confidence. I expect them to enter the Mexican market very soon. But I don’t see pension funds involved in low-grade or exploration projects. Don’t overestimate the CKD effect.

There are many alternatives to capital sources; the bottom line is you need to add value. Structured financing and issuing bonds remain good ways to finance mining projects. The government has changed the regulations for pension funds, allowing them to invest into CKDs. The investment horizon is 10 to 15 years, and while many CKDs have funded infrastructure, there have been none in mining yet. I wouldn’t be surprised if a mining operation uses this source of funding in the future.

Miner ETFs vs. Metal ETFs

160%

NYSEARCA:GDX –42.96%

140%

NYSEARCA:GLD +18.17%

120%

SLV +20.66%

100%

SIL –12.30%

80% 60% 40% 20% 0% -20% -40% -60%

2010

2011

2012

Data compiled by Mining Leaders

Mining Leaders

132

market focus

land

Obtaining a mining concession appears relatively straightforward in Mexico, yet issues—usually concerning surface rights—can arise due to land use designations. Unlike the overlapping mandates of different federal entities in other mining countries, only one federal body governs permitting in Mexico: the Secretary of Economy. This body grants companies (or individuals) a combined and extendable exploration and exploitation mining concession that lasts 50 years. Though the mining concessions are issued at the federal level, complications can arise at the state and municipal level, where mineral rights overlap with surface rights. The majority of Mexican land is designated for agricultural use, meaning any kind of mineral exploration and exploitation requires a “change of land use” permit from the Secretary of Environmental and Natural Resources (Semarnat). Mexican agrarian law dictates the surface rights; yet even though Article 27 of the Constitution stipulates that property and subsoil rights are one,

133

Alberto M. Vázquez Partner VSG Abogados

The mining industry falls under federal jurisdiction. Hence in theory, federal authorities issue all permits, although state governors and city mayors (presidents of municipalities where each project is located) need to write a letter granting consent to use explosives before SEDENA, the Secretariat of National Defense, authorizes their use. Likewise, it is important to consider that most Mexican land is under the ejido regime and classed as agricultural; only rarely does a company come to a project already designated as mineral reserves. The municipality where the project is located grants this designation, and without it the project will not progress.

Fernando de Ovando Partner-in-charge Jones Day

Mining activities in México are under federal jurisdiction regarding matters of environmental impact and concessions. Miners often think that once they have federal approval they can begin working. But that’s not true—land use and construction is a matter of local jurisdiction. Among other instruments, Mexico is implementing land ordainment programs that impose land-use guidelines at four levels: federal, maritime, state and municipal. So when explorers make their assessments they must approach all three levels of government to sell the project, explain the benefits, and forestall any problems that could affect the land and their ability to develop it.

Gabino Fraga Peña Partner GAP Abogados

Sixty-five percent of all Mexican land is public, either belonging to ejidos or communities. Before 1992 the rules didn’t allow the transition of surface rights of ejido land because it was social property. Then Article 27 was changed to allow the incorporation of ejido land as private land. Today the mineral law clashes with the agrarian law, which controls the surface. Given that ejidos usually hold surface rights, it’s crucial to come to a very clear legal agreement to explore and exploit the subsoil, guarded against any posterior challenge from the ejido. The agrarian law is very specialized and many often confuse it with civil law, which can create problems.

the mining title only grants rights to the subsoil. Local communities usually own surface rights and a company must come to a legal agreement before it can access the land. The entities that own public land in Mexico are usually ejidos, rural agrarian communities with origins in the Mexican Revolution. Miners have erred in the past by coming to agreement with only the leaders of the ejido, often without consulting the entire community. Selective

agreements can create big problems for mining companies. Miners have found it crucial to negotiate with the wider community, via resolutions adopted by the Ejido Meeting, complying with all of the formalities and requirements of the applicable agrarian legal provisions. Most important in the process is to hire a local lawyer with experience of mineral law; there have been instances of large projects being put on hold due to poorly drafted contracts incompletely transferring ownership to foreign companies.

leader insight Mario Hernández Partner, Head of Tax Practice KPMG

After years of exploration, development and multimillion-dollar investments, advanced-stage mining projects in Mexico face a fresh challenge: the new mining law. Though the government states that most of Mexico’s mining peers, like Peru and Chile, have effectively implemented a royalty, KPMG’s analysis concludes differently. Given the higher costs of business in Mexico, lack of government incentives, and other fiscal charges, Mexico’s competitiveness will likely take a hit if the royalty is imposed.

A Royal Pain The current law proposes a regional development committee to oversee the distribution of royalty revenues. In our analysis, there are no mechanisms to guarantee that the money will be used effectively. The committee model, as it now stands, states that five different stakeholders will be involved As it stands, mining companies producing in Mexico already face corporate taxes of 30% on in selecting the development projects to be profits along with an employee profit sharing (PTU) of 10% of profits without considering built from royalty funds. Each committee inflation, plus a series of “royalties” on concessions based on the size of the land being will include one representative from the exploited or explored. In comparison, Chile implements a tax of 18.5% on profits along federal, state and municipal governments, with a royalty of between 5% to 14% on ebitda. Peru’s tax system is more rigid, with a along with a community leader and a mining corporate tax of 30%, plus a royalty of 1% to company affiliate. With so many actors 12%, a mining tax of between 2% to 8.4%, involved, it’s clear that the process for creating plus a “special contribution” of between 4% regional development will be extremely Given the five disparate to 13.2%. At first glance, the introduction of bureaucratic, slow and ineffective. There are players on the committee a royalty in Mexico may appear reasonable many examples of mines doing stellar work overseeing distribution of given the comparison to the percentage in communities because they want to. Miners royalty revenues, it’s unlikely rates of Peru and Chile. aren’t obliged to build hospitals and schools they will choose projects or reforest an area, but they often choose to. efficiently. But unlike its peers, Mexico offers no Given the five players on the committee and their inevitable conflict of interest, it’s unlikely incentives for the mining sector to help offset they will choose priority projects efficiently its negative image. Conflicts ranging from preor, more importantly, keep track of allocated funds. revolutionary Mexico to the 21st century mean miners are perceived as less than wholesome Millions of dollars in mining investment won’t evaporate overnight, but advanced-stage in public opinion. Other industries have been projects could be reviewed in a new light. It’s said that 1 in 10,000 exploration projects will obtained credits related to R&D costs, but become viable in today’s market. But what of companies that have already invested millions even considering all investments made in in developing economically viable deposits? Many of these projects already have financing, exploration, development and construction, but when an additional fiscal burden arrives out of the blue, these miners need to renegotiate miners have secured no deductions in their arrangements. Peru and Chile continue to have large mining sectors after implementing connection with this royalty. A deduction for royalties. Mexico has long been a favored jurisdiction, but the argument that the royalty will funds reinvested in local communities could keep the country competitive is untrue. We believe the government must undertake a much encourage investment in mining, allowing the more thorough analysis to understand why Mexico should avoid the same path as Peru or sector to continue to create jobs and develop Chile and how its competitiveness will be affected. The Senate is expected to review and vote rural areas. Mexico may be more competitive on the law in the third quarter of 2013, and we hope they will be better informed than the now than other mining districts, but if the Chamber of Deputies regarding the impact of the new mining law. royalty is passed, this could change. The Mexican government often argues that a 5% royalty is fair given that other Latin American nations, like Peru or Chile, have also implemented a similar percentage rate without any adverse impact on investment. We believe that Mexico’s initiative needs greater analysis because the government is only benchmarking the percentage rates, rather than overall impact on the country’s competitiveness. KPMG led a study on the new mining law, which concluded that Mexico will lose competitiveness if the 5% royalty is implemented.

Mining Leaders

134

the city & beyond

Photo: Plaza Carso

135

lead article

o one knows how many people actually live in Mexico City. Estimates typically vary between 25 and 30 million, but any visitor flying into Mexico's capital and viewing the endless and immense sprawl will be awed beyond statistics. While the city seems neverending, those visiting on business will mainly spend their time in the Polanco neighborhood, Mexico City's answer to Beverly Hills. Multinationals, lawyers and politicians are all located within walking distance from the fashionable restaurant triangle where multicourse lunches typically end the workday (people are unreachable between 2pm and 4pm due to la comida). On the borough's northern border lies Nuevo Polanco. Once an industrial district, the area is undergoing massive real estate development, symbolic of which is Carlos Slim's Plaza Carso (pictured left), a residential, commercial and cultural mecca. Its crown jewel Museo Soumaya boasts the entirety of Carlos Slim's extensive art collection, and includes pieces by Salvador Dali, Diego Rivera and many others.

Mexico's Day of the Dead (November 1-2), celebrated across the country, is a heady blend of the macabre, raucous and reverential.

For those working in mining, most of the action is understandably outside of the nation's capital, in Durango, Hermosillo, Zacatecas and Chihuahua. Though incomparable with Mexico City, each offers a charming colonial center of inspiring Hispanic architecture. And these cities are massive, leading from hub through to cinderblock tenement housingâ&#x20AC;&#x201D;ciudades perdidasâ&#x20AC;&#x201D;before

passing junkyards and industrial parks that end in desert. Nonetheless, an exclusive neighborhood exists in each city where international-standard hotels are available for visitors. Given the limited importance of Mexico City to mining, travel to the territories is possible via direct flights from the United States. Even so, to avoid the hassle of customs and the Transportation Security Administration, many people prefer to fly to Benito JuĂĄrez International Airport in the nation's capital before taking any of the countless domestic flights to the north of the country. Security remains a large concern for foreign business travelers. Most miners have their own security personnel and there are plenty of reliable and English-speaking car services in every mining locale, providing airport transfers. Even so, Mexico has changed significantly in the four years since 2009, when violence reached a peak. Now, it's trending downwards, and mostly involves those directly taking part in drug-trafficking. While the foreign media often paint a picture of a warzone or the vomitorium of American college students, it is important to remember that Mexico is a large country of 115 million people, with a myriad of gastronomic options, a long, intriguing history and picturesque landscapes. Luckily the mining industry will take you outside of Cancun and deep into the canyons of Chihuahua or the cerros of Zacatecas to see the true beauty of the land and its inhabitants. Mining Leaders

136

hotels

Hotel gobernador

Since opening in 1989, the Hotel Gobernador in Durango has consistently provided luxury service. Recent major renovations to our rooms, halls, business center and beautiful gardens have ensured the hotel maintains its unique lustre. Av. 20 de Noviembre 257 Ote 01 618 827 2500 www.hotelgobernador.com.mx

HOTELS The Hotel Victoria Express Durango boasts quality, whether in its rooms, restaurant or business center. Guests traveling for pleasure or business, will appreciate our dedication to providing outstanding service. Boulevard Francisco Villa 2017 +52 (618) 829 1500 www.victoriaexpress.com.mx

HOTEL VICTORIA EXPRESS DURANGO

137

The Hotel Victoria Ejecutivo Guadalajara's modern architecture offers an original and relaxed atmosphere, making for a pleasant stay during business trips or leisure visits to the city of Guadalajara. Av. Lopez Mateos #1360 Col. Chapalita +52 (33) 3770 6400 www.victoriaejecutivo.com.mx

Hotel VICTORIA ejecutivo

hotels Next to the government center and only 10 minutes from the airport, Hotel Lucerna Hermosillo is the perfect place to stay for business or pleasure. Boulevard Paseo Rio Sonora Nte # 98 Hermosillo, Sonora, 83270 +52 (662) 259 5200 www.hoteleslucerna.com

Hotel lucerna hermosillo

The Crowne Plaza Hotel Acapulco is ideally located on the beachfront, and well-equipped with a fitness center, tennis court and modern furnishings. Av. Costera Miguel Aleman, 1803 Fraccionamiento Magallanes, Acapulco +52 (800) 841 0084 www.hotelacapulcoplaza.com

A boutique property set amidst picturesque turquoise waters and sandy beaches, Sandos offers an intimate experience in the Mexican Caribbean. Retorno Del Rey Lote 37-1 Km 14 Zona Hotelera Cancun, 77500 +52 (998) 881 2200 www.sandos.com

Sandos Cancun Luxury Experience

Four Seasons Mexico City

The Four Seasons Hotel is a blend of Mexican and European heritage, offering the utmost in personal service and modern amenities. Paseo de la Reforma 500, Juárez, Cuauhtémoc, 06600 Ciudad de México, Distrito Federal +52 (55) 5230 1818 www.fourseasons.com/mexico

Presidente Intercontinental Santa Fe offers 111 exclusive suite-type rooms decorated in a contemporary residential style and equipped with the latest technology. Juan Salvador Agraz 97 Mexico City 01 800 9520 300 www.ihg.com

Presidente InterContinental

crown plaza hotel acapulco

Fiesta Grand Chapultepec

This architecturally innovative hotel faces the legendary Chapultepec Park, one of the most beautiful and important areas of the city. Mariano Escobedo 759 Col Anzures, Mexico City +52 (55) 2581 1500 www.fiestamericanagrand.com

Mining Leaders

138

ENTERTAINMENT

Source: Flickr

NIGHT LIFE Pujol Polanco, Mexico City +52 (55) 5545 3507

RECOMMENDED

pujol.com.mx Recommended Dish

Fish ceviche taco served as part of a tasting menu priced at US $55-80 USD $17

USD $66 Le Difese Tenuta San Guido

139

Don’t let Pujol’s unassuming façade fool you, within its walls lies a gastronomic experience many critics consider to be without peer in Mexico. Chef Enrique Olvera combines Mexican culinary tradition with contemporary techniques to create an adventurous menu—insects are well represented—that is in a permanent state of reinvention. In recognition of Olvera’s remarkable cuisine, Pujol was listed 17th on San Pellegrino’s prestigious World’s 50 Best Restaurants list.

ENTERTAINMENT

Xampañería Garcia Av. Nuevo Leon #66, Condesa, 06140 México, D. F. +52 (55) 4432 4073

RECOMMENDED

facebook.com/xampaneriagarcia Recommended Dish Tabla de pintxos USD $8

USD $40 Cava Brut Vilarnau

US$16.00

A slice of Barcelona in the Condesa neighborhood of Mexico City, Xampañería offers a distinct ambiance via food and drink options more typical to Spain. Between jazz nights on Tuesday and paella on Sunday, the bar specializes in bubbly, especially cavas from Catalonia which blend Parellada, Xarello and Macabeo grapes. Whether for the models or the slick-suited businessmen, it's a must visit watering hole.

La Casona

RECOMMENDED

Aldama 430, Zona Centro, 31000 Chihuahua +52 (614) 410 0043 casona.com.mx Recommended Dish

Slow cooked Chamorro with a berry glaze US$16.00 USD $8

USD $35 Vino tinto La Casona

Once the home of Luis Terrazas, governor of Chihuahua and ally of President Benito Juárez, La Casona retains its regal air via excellent food and service. The ornate courtyard is complemented by a menu featuring adventurous twists on Mexican classics, such as Chamorro (pork leg) served on couscous, or Barbacoa in red wine sauce. La Casona also has a well-stocked wine cava and cigar den for those who want to indulge. Mining Leaders

140