John-Mark Staude
President and CEO
Riverside Resources
/
Insight

Ease Exploration Burden to Ensure Future of Mexican Mining

Mon, 10/22/2018 - 14:42

The public and private sectors do not always see eye to eye, and that could not be truer than in mining. Since the federal royalty taxes were introduced in 2013, many operators have been upset with the government as operations that were sustainable have now become sub-economic and John-Mark Staude, President and CEO of Mexico-focused exploration company Riverside Resources, warns this could jeopardize the future of the Mexican mining sector.
“The industry is sustained by mining operations, rather than exploration,” he says. “Exploration will follow and can flourish where there is active mining and if operators are not given the conditions to be successful, there will be no sustained exploration and investment will dry up.”
For the new administration, which will take office on Dec. 1, Staude adds, there will be an opportunity to prove its commitment to the mining industry. “We are a public company and we need to go where the investors want us to and where what we find can be reasonably developed. We are really trying to keep our operations focused on Mexico and we are hopeful about the new government and its ability to bring fresh opportunities and shine a spotlight on the sector’s potential.”
Although he does not expect much change in the immediate short term, Staude indicates that 2020-22 would be enough time for a new government to make an impact. Long permitting processes, delays in issuing mineral titles, lack of liberation of cancelled concessions, lack of action in canceling non-paid concessions and problems with the Mexican Tax Authority (SAT) are all factors he references that contribute to a negative image of Mexico. “One of our limitations is the inability of mining companies to obtain mineral titles and we would really like to see this rectified by a new government,” he says.
Staude explains that mining operations depend on a company’s ability to obtain the land for the concession and slow processes are forcing Riverside to take a new route. “We have five different amparos filed against the government in relation to mining titles,” he says. “Our partners do not understand why we need to take this route, and it is expensive, but ultimately it appears this is the best legal way we can secure mineral titles.” He notes that Riverside spent US$6 million on R&D in 2017, but says if the company cannot move forward and obtain more concessions, this year the investment in Mexico will be significantly lower.
This US$6 million investment is also a point of contention with SAT due to a miscommunication, Staude says. “We brought US$6 million in FDI into Mexico but the government says that the money is earnings and we must pay tax on it,” he says. This misunderstanding has been unresolved for seven years and Riverside has an active amparo preventing the government from claiming this money. Many more companies have reported issues in trying to obtain VAT refunds from SAT, and Staude says this has caused many companies to leave Mexico. “Riverside even has a division dedicated to tax recovery for our partners,” he says. “I am sorry we have to do that because we are a mineral company and it should not be necessary for us to dedicate our time to tax recovery.”
He advocates a tax reform as the first step for the new government. “In Mexico, even things like facturas (invoices) are much more complex than in other countries,” he says. He believes the current system is harming employment, since Riverside is now unable to hire so many employees. “We are conscientious about complying, working to carry out exploration activities effectively and serving all stakeholders well,” he says.
Staude adds that these conditions are driving companies to other jurisdictions like Finland, Australia, Peru and Ecuador, which are more workable. “Right now, there is a lot of potential for Mexico, especially since zinc prices are increasing and Mexico is a zinc country.”
But even Riverside’s partner, Centerra Gold, has been looking to other countries for new operations. The company has bought seven mining and development projects in Canada over the last three years, and Staude believes this money could have been directed at Mexico. “It is exciting to see such an increase in mining activity,” he says. “If mining rules in Mexico were adjusted to be more favorable to FDI, investment could flood in.”
Investment attractiveness is especially important considering the long-term nature of mining projects. Staude explains that, prior to his time at Riverside Resources, he worked as a translator between the USGS and Mexico’s geological survey.
The Cecilia project in Sonora, now part of Riverside’s portfolio, was a site he visited around 30 years ago, and at that point only four drill holes had been completed. “Now, 30 years later, the project is more developed and Riverside has a 100 percent option agreement on it,” he says. “This demonstrates the long-term nature of mining activities; it takes years and for things to line up efficiently.”
All things considered, he believes Sonora is one of the most favorable mining states in Mexico, and he identifies the northern state as a focus for Riverside going forward. “Sonora is very mining friendly, and not only is the government welcoming but so too are ejiditarios and landowners,” he says. “For the remainder of 2018, we are looking to expand that activity and we were happy to come to long-term access agreements with landowners.” Riverside looks to make a positive impact in these communities and Staude says the company installs infrastructure as often as possible as part of our community agreements.
Community relations are of the utmost importance when starting mining operations, he stresses, which is why Riverside finds states like Sonora, Chihuahua and Durango in the north generally more favorable than those in the south. “The southern half of Mexico has great mineral potential but there are often complications in permitting,” Staude says. “That being said, we feel that area could really be served by mines and the economic benefits they can bring.”
Riverside’s ideal projects are located in an area of high prospectivity, according to Staude, and are often close to historic mines with existing infrastructure. More importantly, the exploration company seeks locations that are favorable, workable and rational. “We do not enter locations that are very anti-mining, conflict areas or areas that involve illicit activities,” he says. “This is especially important for partners, who trust that we select the project well. If we had an incident, we could lose the capital and confidence of our partners.”
Strategic partner Centerra has funded its Glor gold project in Sonora. The 17.2km2 Clemente project in the same state is optioned to Silver Viper Minerals and is located just 7km to the northwest of Goldgroup’s Cerro Colorado mine. “Centerra has been a very good partner in past years,” says Staude. “We were lucky to have such a strong partner during the downturn, which has stood us in good stead as we head into an upturn.”
Riverside has positioned itself well for a metals price hike, not only through its strong JV partners, but with its financial health. The company is debt free, and Staude says that, although the company has had to use equity, the strategy of using JV partners contributes greatly to its finances. “We were able to carry out the work for partners in Mexico to remain debt free and hopefully we can do that again in the future,” he says. “Maybe if there are regulatory changes, partners will return to Mexico to work with us and others and create jobs and prosperity in Mexico.”
Staude says the key to successful JV partnerships is to have local Mexican staff and work with them closely. “The vast majority of our employees are Mexican and we have been bringing capital from other parts of the world,” he says. Now, 42 percent of Riverside’s shareholders are European, rather than Canadian. “We really need those local operational partners that are trustworthy and have a long-term view,” he explains. “We have to be constantly thinking about the return on capital we can offer investors in the long term.”
This is why he believes the new administration can improve the industry to instill much more investment certainty. “Mexico is doing things well environmentally, but we need to ensure that permitting becomes less political and more efficient,” he says. “The industry can follow regulations but they must be fair rather than politically motivated.”
Staude points out that, if these few issues – permitting, mineral concessions, certainty – are addressed, Mexico could become a leader in mining. “The government has succeeded in pushing capital away from Mexico but there is still money eager to enter the country if investors can see a possible return for the risk,” he says. “There is a choice for the new administration on whether it wants to take advantage of this scenario. We are definitely excited about the future of mining in Mexico. We do everything transparently, so we need to be able to expect transparency in return.”