Betting on Base Metals with Sustainable Growth

Q: With zinc prices rallying, what is your midterm outlook for the metal and how is Americas Silver positioned to take advantage?
A: We have been very bullish on zinc. We just built a new zinc-silver-lead mine, San Rafael in Sinaloa, which came online in December 2017 and is now ramping up. Our internal estimates envision zinc prices averaging about US$1.40/lb over the next three years. Even though those prices are not as high as the prices we are seeing today, as an average this number makes us very bullish on the metal. We see strong deterrents on the supply side with respect to environmental regulations and dropping grades in China. These are all factors we believe will continue. We also see dynamism from the offtake side. We signed a four-year contract with Glencore, which would have been unheard of two years ago. We will produce about 45 million pounds of zinc in 2018 from our Sinaloa mine and rising in 2019. This compares to 9 million pounds in 2017.
Q: In terms of diversification, to what extent have you looked to emerging metals like lithium that are surging in demand?
A: I have been in the mining industry since 1994. In this time, there have been many trendy metals, like rhodium, rare earth elements, molybdenum and now lithium. We do not feel the hype is sustainable over the long term, as prior experience has taught us. Right now, lithium and cobalt are doing well, but molybdenum is not. We understand the supply-demand fundamentals of the metals we are involved in. That being said, we are very bullish on zinc, lead and copper and we will be a very fast follower, increasing our brownfield and shutting down silver production when prices go up.
Q: How would you evaluate the operating environment in Sinaloa?
A: Our CSR strategy is always based on quality employment opportunities. In terms of the Sinaloa property, much of the groundwork was already done by Scorpio Mining, the company we acquired, and it did a fantastic job in laying the company’s foundations in the area. Cosala is a small community and a substantial portion of its GDP comes from our activities in the area. We employ around 350 people, and when including the supply chain and indirect employment, the community recognizes how much of a benefit the mine provides.
More broadly, the main challenges when investing in Mexico can be seen as common to almost all jurisdictions. Property rights issues can be a challenge since the system can be formalistic and rather cumbersome. Sometimes it is not clear who has what interest in a property and the process for a final determination can take a very long time while having significant implications. We have worked through this and feel that things are getting better with both the system and our familiarity with it.
We have a good workers’ union, which has been understanding of the dynamics of our business. For example, we had 450 people working here when we took over the company and, unfortunately, we had to lay off 220 people in the first few months. We did this with every intention of re-hiring these people as soon as the company turned around. We stuck to our word and now our staffing levels are up to more than 300. There is a chance that this will climb further when Zone 120 comes online.
Another challenge is finding a balance in our community activities and investments. For example, if the local government requests resources for a certain activity or project, we must consider how our contribution will be valued by the community. It may be better to independently take on projects that directly benefit our closest stakeholders. We are happy to contribute and ensure that all people in the towns we operate in get value from the mine. But we also want the community to see that we are the source of this contribution and this is not always clear with government-run initiatives, including the Mining Fund.