Jose Manuel Allende
Strategic Planning and Promotions Director
Bolsa Mexicana de Valores
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View from the Top

Drawing Mining Companies to the Mexican Stock Exchange

Mon, 10/21/2013 - 14:20

Q: How have the equity culture and attitudes towards the Bolsa Mexicana de Valores (BMV) changed in the last decades?

A: The equity culture in Mexico has changed significantly, particularly in the last decade. The pension funds regime was changed in 1997. These pension funds, known as the AFORES, now handle around US$150 billion, while mutual funds handle around US$150 billion, and insurance companies handle around US$40 billion. Altogether the BMV is now handling around US$400 billion in savings, which has made a great change to the dynamics of the market. There is a lot of money in the exchange which 10 or 20 years ago simply was not there but today provides an important source of long-term funding in the local market. In the last five to 10 years the BMV has also developed a local institutional investor base which needs to invest in local products in Mexico.

The BMV has evolved dramatically in the last 10 years. It now has a large and resourceful investor base, and its infrastructure, management procedures and regulatory framework have advanced enormously. The securities market law in Mexico meets international standards, and the BMV has invested heavily in world class technology and trading systems. The brokers’ houses have also grown dramatically in number and size, and in the services that they provide to customers.

Q: The Bolsa Mexicana de Valores has recently listed itself on the market. How has this changed its overall operations?

A: As part of a restructuring, the BMV was first listed in 2008 in order to raise money to acquire a different set of companies that provide a range of services on trading, clearing, settlement, and provision of information on the market. By doing so the BMV was able to develop a comprehensive infrastructure to provide support to the financial market, which has helped us to become much more proactive and aggressive, and resulted in dramatic growth. It also brought a lot of innovation, which has been important in helping the BMV to compete with the US and other markets. By being listed we are also sending a message to other companies, promoting that they join the BMV as well.

Q: The BMV recently made progress towards joining the Integrated Latin American Market (MILA) when it bought a stake in the Lima stock exchange. How will this venture impact the competitiveness of the BMV?

A: The Exchanges in Chile, Colombia, and Peru have already established the MILA agreement, which facilitates cross border trading, and we made a direct investment in the Bolsa de Peru. It is hoped that from 2014 the BMV will be part of that market, but first we require regulatory changes in order to adapt Mexico’s trading model. We are working on that and hopefully by next year we will be routing orders directly to the local market, so that for example Mexican investors will be able to acquire shares in Peruvian mining companies, and vice versa. During the second stage of the MILA concept IPOs could be done in other markets.

Q: Mining companies were the first to issue financial instruments in Mexico. What role does the mining industry play in the development of the Bolsa Mexicana de Valores?

A: The mining sector was one of the very first sectors to come onto Mexico’s stock exchange, many decades ago. There is now a special sector index for mining, but it has mainly been the bigger mining companies that have been listed. These big names that are already listed on the BMV account for an important proportion of the mining sector GDP, so in that sense the mining sector is important for the BMV. Several hundred companies are investing in the mining industry, many of which are foreign owned, and these companies could eventually be listed on the BMV.

Q: How can a listing on the BMV, as well as the other instruments that you offer, benefit Mexican mining companies?

A: Rising share prices are a good incentive for mining companies to list on the BMV; valuations in Mexico are very good at the moment, making it attractive for companies to raise money through the market. Many mid-sized companies simply do not consider the BMV, disqualifying themselves based on the belief that they are not big enough or that they will not comply with the requirements. Once production has been going for a couple of years mining companies would do very well to list on the BMV, and the risk element would not be a factor.

Mining operations are capital intensive, particularly in the initial stages, and they must be funded by equity as opposed to debt, but mid-sized mining companies are often not quite big enough to have a full listing on the exchange. The innovations introduced by the BMV in the last three or four years, and the new instruments that have been developed, provide a valuable source of funding for mid-sized mining companies. For these companies the instruments can act as a stepping stone - they give them access to the capital they need in order to develop their projects, to grow, and eventually to do a full listing on the BMV.

Q: What is BMV’s strategy to motivating international investors and brokers to invest in the BMV, and specifically in mining companies?

A: We are focusing now on attracting a new set of investors, such as high frequency traders. It is computers that send orders to the exchange and provide the liquidity these days, and we are making big efforts to ensure that high frequency traders know that the exchange is an easy access market with fast execution. These investors are important because they provide a lot of liquidity, and the most important thing for a market place is to have liquidity. Similarly, if mining companies have greater liquidity, by nature they will attract more investors.

With regards to the TSX, Toronto is a prime mining market and over many years has developed an investor base that perfectly understands the mining industry. Toronto has investors that are prepared to accept the inherent risk involved in investing in the early stages of a mining project, such as the initial phases of exploration, reserve certification and pre-feasibility and feasibility studies. For that reason most mining companies want to be listed in Canada.

The Mexican stock exchange can complement the offering of the Toronto stock exchange – many mid-sized companies that are already listed in Toronto are heavily invested in Mexican mines, and a listing in Mexico can provide them with local exposure, promoting them as a local company. Many companies that are based in Canada are seen as foreign, even when they are heavily invested in the Mexican industry and have all of their assets in Mexico. From the moment that a company becomes listed in Mexico it starts to have Mexican investors - it has to be more transparent, and the company starts to be seen as more Mexican; these things can add real meaning to a project. The base of investors that we have locally would be willing to invest in these types of companies, and as the Mexican market evolves we will also be able to attract specialized investors.

BOND INSTRUMENTS (CERTIFICADO BURSÁTIL)

“This is an extremely flexible instrument for mining companies to make debt placements. They work similarly to a bank loan: companies make placements according to their requirements – deciding the currency and whether it will be long-, medium- or short-term. This is a good incentive for stabilized, income-producing companies.”

CERTIFICADO DE CAPITAL DE DESARROLLO (CKD)

“CKDs are similar to a private equity fund, except that they are listed on the exchange. In Mexico these provide a way for institutional investors – such as pension funds – to gain access to the market. With the CKDs the BMV combines all of the benefits of a private equity investment, within a secure environment of disclosure, corporate governance, and supervision. Through this instrument it is possible to invest capital in six to 10 companies, diversifying the risk and helping to build these companies up in the hope that in a few years they will be able to make a full listing on the exchange. This makes the instrument very attractive not only for investors but also for companies looking for investment.”