Demand For Mining Projects Shows No Sign of Slowdown
STORY INLINE POST
Q: How has the mining industry performed in your portfolio of activities when compared to other industries that you work with?
A: The mining industry has been our main source of work for more than 20 years. While many law firms have had problems derived from the COVID-19 pandemic, for the past two years we have had the good fortune of participating in medium-sized transactions in the Mexican mining industry. Additionally, in the last six months, we have been involved in much larger transactions that deal with world-class projects. At the beginning of 2020, we witnessed a new wave of interest in Mexican mining projects, particularly due to a cyclical alignment of factors that included fluctuating commodity prices and the added uncertainty with which investors were contemplating their next move in the midst of the pandemic. Many people considered mining as a kind of shelter from this uncertainty and instability. Companies that invest in mining want to avoid declines in share prices that are too sudden, steep, dramatic or definitive. Investors want protection, so they place their resources in mining projects. This is why there is a significant number of junior companies participating in mining exploration projects in Mexico.
We also work with the tourism and pharmaceutical sectors and neither of those industries saw the activity that the mining sector did. Furthermore, the resurgence we witnessed in 2020 was sustained throughout 2021, and the larger companies got involved this time as well. There were many ownership transfers of established and consolidated brownfield mining projects. Many of these junior companies that came to Mexico through only one project in 2020 spent 2021 looking for their second and third projects. All of this happened despite the industry spending three months at the beginning of the pandemic with almost all of its activities completely halted. This did not stop the tide of investments and projects in the mining sector.
Mexico’s mining sector continues to generate a great deal of interest from investors due to the mining history of our country, the amount of minerals in certain parts of the country and the fact that for the last 30 years, the Mexican Government has promoted investment with suitable laws and through the existence of USMCA, previously NAFTA, which is a great tool. The concerns of mining companies have been focused on all proposed amendments to the Mining Law and other laws that affect the mining industry. In comparison with other countries in Latin America, Mexico is more politically and legally stable. It also has much more infrastructure than other countries.
Q: What important opportunities have you have identified in Mexico’s mining sector in terms of M&A?
A: We have identified a number of interesting opportunities, especially among junior companies. Some of these companies were ready to launch their projects but ended up running into obstacles when trying to raise capital at the last minute, or they failed to reach their investment goals by small margins. Others were small Mexican companies connected to one or two people who had trouble hanging onto some of their capital due to unforeseen circumstances generated by the pandemic. This created an opening for M&A surrounding smaller mining projects that have potential and that are incorporating their reserves. These are not famous world-class projects but they have a role to play in the industry. In general, many investors turned out to be more interested in those projects than in larger mines that are in the production phase. Moreover, commodity prices are recovering quite well and are expected to rise further. Therefore, investors are not necessarily eager to cash out in the short term. They are looking for assets to back up and strengthen their portfolios.
Q: How has the mining market adapted to the lack of new concessions?
A: Many people are confused about what is commonly being referred to as “the lack of new concessions”; there are many misinterpretations of this vague and confusing message from public authorities.
It is important to distinguish between two things. One is the fact that the government will not release new ground from those canceled mining concessions, meaning mining concessions that covered certain ground and that were canceled by the government; that is the policy of the government, not what the law states, but still the government can release new ground from previous existing mining concessions at its discretion.
The other thing is the fact there exists a number of free grounds to be staked. Due to the aforementioned “there are new concessions” policy, the government will not grant a new concession over free ground as a result of a legal and valid application for concession. However, conducting a legal proceeding at court, it is possible to get new mining concessions.
Unfortunately, you cannot escape the economics of this situation. With no new concessions, supply is going to be greatly diminished and the prices may increase as a rule of supply and demand.
As mentioned above, the truth is that you are technically able to apply for new concessions but you are looking at a years-long process to see them come to fruition and with no certainty that they ever will, at least not with the stance the government has been taking. However, there is a great deal of hope that the transition into a new government in 2024 will introduce new wisdom in the matter.
RB Abogados is a Mexican law firm founded in 1993 with a focus on corporate and transactional law related to the mining sector. It specializes in mining transactions conducted mainly by Canadian mining companies in Mexico while also working with Mexican companies.