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Analysis

Leading Metals Trader Seeks Mutually Beneficial Deals,

Wed, 10/21/2015 - 08:38

Whether the demand for minerals and metals is rising or falling, traders such as Nexxtrade provide a market for these products at all times. By purchasing entire production batches, stocks of minerals and concentrates, and by-products from mines, smelters, and refineries, traders are able to link the supply of one country to the demand of another. Nexxtrade, also known by its corporate name MK Metal Trading Holding, trades copper, lead, zinc, silver, and gold concentrates, mainly coming from Latin American producers, and uses a global network to find a market for these products. “Market knowledge is the added value that traders offer to mining companies. We analyze all the potential markets through our established network to identify where the minerals should be sold,” shares Nexxtrade’s CEO.

Using its network and database of information, traders are able to buy products from mining companies in advance and decide whether to go short or long with the resources it holds. “When we see that we will have an oversupply of copper concentrates within the following year, we go short, which means we sell even when we do not have the material. This is because we know that eventually we will be able to buy it and sell it at a more competitive price than the suppliers,” states the CEO. “When we see that there will be a deficit in the market, we go long, which entails buying the metal and sitting tight until we identify that there is not enough metal concentrate for the smelters, and then sell it.” These transactions, however, carry a risk since a trader might sell material that they later cannot supply, or buy metal concentrates at a high price only to find that the production of the metal continues to rise and the price lowers.

Being successful in this risky area relies on intimate knowledge of the markets and the factors that influence them. For example, according to the CEO, the markets are currently very volatile and react particularly strongly to activity in China. When China introduces a new policy that favors a certain metal concentrate, it is common for players to start looking for that concentrate or for a concentrate with a high content of that metal.

This link to China has actually worked in reverse, given the interest that Chinese traders have shown in Mexico. Back in 2010, Nexxtrade had to stave off competition from Chinese traders looking to bank on blooming mining sectors in Latin America, such as Mexico and Peru. But the CEO describes how these trading propositions were not exactly in line with the market expectations. “These traders would deal in numbers that were way out of proportion and were unrelated to market conditions. Often, they would buy material from small mining companies and pay 70-80% as a provisional payment. Once the material was exported, they did not make the last payments and never came back to Mexico to do business with that mining company,” explains the CEO. This led to a situation where medium and large mining companies in Mexico and Peru refused to sell to Chinese traders. “Companies preferred having the guarantee that the transaction would be properly executed by doing business with long-term traders, even if the terms were not as favorable.”

Nexxtrade taps into the need of mining companies to feel like they can trust traders. Having prior business experience with the company is the first priority for Nexxtrade, which is why it carries out very strict due diligence on a prospective new client. The only companies that Nexxtrade does not carry out verification processes with are mining giants such as Industrias Peñoles or Grupo Mexico. All others must fulfill a list of requirements. The list includes verifying that the paperwork of the mining concession is in order, that the company’s registration with the tax authorities is complete, and that the power of attorney is lawful. Mining companies also provide Nexxtrade with preliminary information about the material that they produce and their capacity. If it is assured that a client’s operations abide by the requirements of the law and Nexxtrade believe that the company can deliver on its promises, then it follows up with a visit to the mine. Nexxtrade sends mining engineers to check that the mine can produce the stated capacity. Once this process is completed successfully, negotiations start on the terms and volumes. While large companies easily get at least considered by Nexxtrade, this does not mean that the company is letting SMEs fall by the wayside. The CEO says that dealing with Nexxtrade actually gives SMEs an advantage, given how expensive it is to run their own marketing team researching all the smelters available around the world. “By the virtue of being in the market all year long, we can offer smaller mining companies the best terms possible at whatever time these need to do business. Furthermore, the ability to blend materials is another competitive advantage that we offer. There are complex materials in Mexico and Peru that inexperienced parties will not be able to acquire.”

Nexxtrade’s responsibility to its clients does not end once the trade is agreed upon. The company also handles the logistics of the goods, as well their blending and selling. While warehousing is outsourced to a third party at the port of Manzanillo, and while another company handles sampling and analyzing, Nexxtrade’s staff supervises all of these processes. “We are very conservative and try to keep all parties involved satisfied with our services. If we identify that the grade of the material coming in is lower than what was agreed, we alert the mining company so that they may take their own samples and verify the problem. If we blend the material before notifying the company, it could cause problems between Nexxtrade and the mining company. The fact that we rely on third parties has increased our cost and impacted our profit, but it has increased our transparency as well,” reveals the executive.

Given its ability to supervise aspects such as blending and selling of minerals, while understanding their evolving value, Nexxtrade is also in a strong position to make recommendations to clients as to how they can improve their processes and deliver higher grade material. Most of its recommendations focus on production strategies, such as avoiding the production of material with high arsenic content. The application of such recommendations benefits both parties since their business will see minerals sell at better terms. Furthermore, Nexxtrade also seeks to be flexible in the material it accepts from its clients. If a contract states that the maximum arsenic concentration in the material is 0.4% and a client delivers material with 0.45-0.5% arsenic, it can charge an extra US$100 per tonne. However, it is ready to accept material with a lower grade or a higher content of arsenic without extra charges if it is able to blend and sell the material without incurring losses. “This is something that almost no trader does and is done because Nexxtrade is interested in forming long-term business relationships. In cases where we simply cannot be flexible due to market conditions, as is the case in the current copper market, we bring some material from abroad to fulfill the market requirements and pass the costs to the client,” says Nexxtrade’s executive. In 2013, Nexxtrade had to bring in “clean” material from Peru because many copper mines in Mexico were producing copper concentrate with increased arsenic content. The costs were then simply passed on to the mining companies in Mexico which had supplied the original material, without Nexxtrade seeking to make more profit than stipulated in the contract.

It is no surprise that Nexxtrade’s broad involvement and expertise of the mining industry led to some suitors. In 2011, Ocean Partners acquired a controlling interest in the company, with Nexxtrade feeling this was the right move due to the two firms sharing the same values. The description of the acquisition would make many entrepreneurs envious, as the CEO explains transition was hardly felt within the company. “Nexxtrade is still working with the same smelters as we were before. We do coordinate with Ocean Partners and make use of its network to give our suppliers the best terms. If we find a better deal through the Ocean Partners network, then we sell the material through it, but if we find a better deal through our own network, we do an independent deal. We are not bound to any exclusivity conditions.”

The deal has actually broadened Nexxtrade’s horizons. In projects that Ocean Partners has with Canadian companies such as Goldcorp, it has been called in to take care of the local consulting due to its knowledge of logistics, warehousing, and taxes in Mexico. Nowadays, about 40- 50% of the support that Nexxtrade gives to Canadian companies is through the business relationships that Ocean Partners has. “We see a good potential for Mexico as a mining country, and we therefore have people working close to the mining companies established here. Shortterm players will impact our profits, but we expect to keep the clients that we have now on the medium- and longterm and offer them competitive deals. In some cases, we seek to make a profit in other mining jurisdictions while the situation in Mexico improves,” he concludes.