HOW IS GEOPOLITICS AFFECTING MINERS AND HOW CAN THEY HEDGE AGAINST VOLATILITY?Mon, 10/22/2018 - 13:23
Late 2016 brought a wave of geopolitical uncertainty with a series of shocks, first with the UK’s decision to leave the EU, then the election of Donald Trump as President of the US. This volatility continued over 2017 through the NAFTA renegotiations and trade wars, and has crept into 2018 with the Mexican presidential elections won by wildcard candidate Andrés Manuel López Obrador. Even though mining thrives on uncertainty, secondary factors such as regulatory and trade clarity are affecting profitability for miners. Mexico Mining Review asked industry leaders what effects have been felt so far and what are they doing to protect themselves against future shocks.
I personally think that the industry is pretty well-positioned. I would say that in 2011, when metals prices were at their peak, the industry got rather lazy. But then as prices for silver and gold declined over the ensuing years, the industry was forced to address some of those areas where it was a little bloated. Costs were reduced, marginal mines were either shut down or sold and balance sheets were really improved. In 2011, companies were pursuing growth at all costs without financial discipline in terms of capital allocation and ROI. But now I think the industry has a much sharper focus on true profitability and returns to shareholders. I feel the industry now is in a much better position. Silver and gold prices have stabilized and strengthened. US$1,350/oz is a very attractive price for the industry and underpinning this is exchange rate volatility, debt levels, geopolitics and supply set to further decline.
The new administration should take into consideration how countries like Australia have found a model that works for companies, the environment and the communities that live near the mine operations and production processes. Prices are created by global demand and companies need to make sure their costs are as low as possible and productivity as high as possible to withstand any type of volatility. Technology, best practices and environmental and community considerations are all necessary elements for a longer term profitable and sustainable industry. Australia and New Zealand are leaders in these areas. We believe that Mexico can learn from the sharing of such programs as the industry moves forward.
Legal certainty is a critical factor. In other mine jurisdictions, Tax Certainty Contracts guarantee miners that the government will maintain a steady tax regime during the time a company is investing in and operating a mine. I think these could be very beneficial to foster investment in Mexico. Also, the closing process and miners’ obligation to restore land to its previous condition need to be reconsidered. Mining companies have to make this ecological recovery investment after the mine has closed and they are no longer receiving returns from it. This does not make any accounting sense, as this expense is not deductible during the mine operation because it has not been paid, and when it finally is, the company is no longer receiving income from the mine. This payment should follow the model of a pension fund. Companies would pay a certain amount to a trust fund for the closing of the mine, which could be tax-deductible.
I cannot predict gold prices, which is why we try to work with quality projects that can withstand the price movements. When we acquire projects, we factor in the volatility of the metal price for that reason – gold prices are unpredictable. Right now, we are in cash conservation mode until there is a clear picture of the next president's and the new governor of Veracruz's goals for the industry, but we will reinitiate operations when the timing is right. But there is a big change going on in Europe and Canada, where there are rumblings of big banks cutting back on their research platforms. That will be a shakeup for the market, and potentially the BIVA has arrived at an opportune time.
Volatility around the world is benefiting metal prices as well as funds in various stock exchanges. However, the country also needs to take into consideration the possible impacts of the 2018 presidential elections on investment and the exploitation of mineral resources in Mexico. The mining industry faces some of the strictest and highest fiscal requirements at a municipal, state and federal level in comparison to other sectors. This affects the country’s competitivity as mining companies can pay less taxes in other jurisdictions. One challenge is to reduce financial requirements for the BMV and reduce the cost of participation. The appearance of a new stock exchange in the market, BIVA, is a good option for the industry.
The first challenge is cost reduction. This remains a priority as volatility in mineral prices continues to push companies to be more efficient with their capital and operational models. The second biggest challenge is the tax regime. Mexico represents about 2-3 percent of the global mining industry, but it has a large amount of potential to grow as the country is rich in minerals. Many regions have still not been explored and this is one of Mexico’s main advantages. The country would be able to better seize this abundance if problems such as insecurity and disrespect for the law were solved. Mexico also needs to improve its logistical infrastructure to enhance exportation and importation.
I think NAFTA is a very relevant issue to consider. Politically the treaty is useful as it allows us to access the US and Canadian markets but renegotiations need to consider that Mexico does not have the same living conditions as the US or Canada. We must strive to gradually diminish the gap between NAFTA members. It must be gradual because many foreign investors chose to come to Mexico for the low wages, so we cannot suddenly increase them to regional parity as this could impact investment in the country. We cannot risk bringing about more unemployment. Also, the higher the profits we make, the more income tax increases, which can lead to high inflation rates.
I think it is important to see opportunities. We do not know what will happen with NAFTA but from what I am hearing right now, negotiations are going relatively well, and we are optimistic about it. For us, the companies listed on the BMV are so diversified in terms of sectors, sizes and business segments that the impact of geopolitical uncertainty has been much less intense in Mexico. I think that Mexico, just like the other two countries in the agreement, needs to see the renegotiation of NAFTA as an opportunity to turn to other markets. Mexico does not only have NAFTA, but also a great number of free trade agreements with other countries, even though the majority of trade is focused on the North American region.