Incentivizing Exploration under Present Market ConditionsWed, 02/04/2015 - 17:57
Moderator: Mario Arregoytia, Lead Partner for Mining and Metals for Mexico and Central America of Ernst & Young
Panelist: Alberto Orozco, Vice-President of Exploration, Argonaut Gold
Panelist: Raúl Cruz, Director General of SGM
Panelist: Armando Pérez Gea, Director General of FIFOMI
Panelist: Alain Charest, Country Manager and Senior Geologist of EvrimResources
To introduce the theme, Arregoytia spoke about the importance of mining investments to almost all industries, requiring long-term targets and goals to ensure its continued profitability despite its cyclical nature. This nature brings about highs and lows of volatility which impacts the way mining companies settle on these long-term targets and goals. Arregoytia stated that for the sake of the global economy, mining must always continue but this presents certain major challenges. For example, gold and silver reached high peaks during 2011-2012 when their upward cycle ended and a downward trend began. While lead and zinc were not so affected by this trend, copper and iron similarly saw downfalls starting at this time. The implications of this trend include the fact that investments in mining exploration may be cut since these investments mirror the downfall of the metals, reaching a peak in 2012 and falling thereafter. This is due to mining companies being under pressure from investors to ensure short and medium-term profits. Investors only see mining as a good investment when prices are high. In such times, Arregoytia stated that investors may steer away from mining, leaving few funds around to ensure further exploration investment. Some majors have the cash flow to continue but these are not in the majority as many projects have stopped. However, these volatile times provide a good backdrop to review exploration strategies to review which projects are worth exploring and exploiting.
Alberto Orozco was asked how this cycle of volatility was impacting Argonaut Gold, which is a newer mining company that focuses primarily on gold. Orozco announced that his company was facing low prices and high costs. Argonaut is trying to control costs and exploration has been affected as a result of this. In 2013, Argonaut had a large portfolio of projects with high exploration risks. Sadly, since exploration has been affected, Argonaut is assessing what to keep, what potential lies in forming joint ventures, and which projects will bring in high profits. Mostly, the company focuses on brownfield exploration projects, which can be seen as strong opportunities even in tough times.
Given the exploration experience of Evrim Resources, Alain Charest was asked how he is maximizing the project he gets to keep. Charest answered that all exploration companies in Mexico and Canada are in survival mode. To get out of this dangerous situation, the industry must learn how to attract Canadian investors once again. To do this, a radical transformation is necessary. Charest pointed to a time 30 years ago when the mining industry already transformed itself to seek to curb a trend in dwindling profits. He pointed to China as the largest gold producer in the world, which produces 13 billion ounces a year. However, only one Chinese gold mine could be considered big since most mines are very small. He encouraged mining companies in Mexico to see the potential of smaller mines, since larger deposits have been exploited. This movement must come from major companies so that exploration companies change their focus to smaller prospects, given the potential to increase gold and silver resources in Mexico in this way.
In a continuing theme, Arregoytia asked Raúl Cruz what the SGM was doing to support Mexican exploration efforts in this time of low prices. The answer from the SGM leader was that exploration lay at the heart of the mining industry. People who do not know their geology cannot assess or exploit their resources, making exploration all the more important to increase wealth around the world. SGM has been seeking to help exploit Mexico’s resources as much as possible, by creating maps and carrying out geological studies. Cruz says that SGM now understands which regions of Mexico have the potential for mineral or hydrocarbon reservoirs and can now better assess where to drill. To help curb this downward exploration trend, SGM will continue this strategy, look for new deposits and for new ores previously unfound in Mexico. It will then share that information with the sector to help boost flagging private geological efforts. He gave the example of a very successful gold/silver/lead/zinc/copper in Zacazonapan that was exploited due to SGM findings.
Mario Arregoytia stated that FIFOMI is essentially a bank for the mining sector and asked Armando Perez Gea how the Mining Development Program would help revive flagging exploration fortunes. Pérez Gea answered that, in the MDP, the onus is put on the development of innovation. Companies need to talk about new prices and market conditions but overall, companies need to become more efficient and innovative, regardless of costs. He stated that the federal government would be willing to innovate along with the private sector. The MDP states that this innovation should not only be focused on majors but should also promote the development of SMEs. To help SMEs, FIFOMI is now obliged to finance mining SMEs both in production, processing, and exploration. Therefore, FIFOMI will begin ramping up project financing, under a scheme that would provide appropriate collaterals according to different priority conditions. As a small entity, FIFOMI has a small portfolio of less than MX$3 billion but this gives it far more flexibility in what projects it choose to finance and how. It works with the SGM and its own experts to carry out its investigations and assess which projects are the most attractive. Furthermore, our ceiling for investment has increased from US$5 million to US$25 million to help SMEs in a larger way. Besides that, Cruz believes the government should also be a partner in exploration projects and FIFOMI is happy to partner up with the commercial banking sector for projects needing more than the US$25 million ceiling