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Analysis

Mexico and Canada: Great Mines Think Alike

Wed, 10/18/2017 - 16:55

Canada and Mexico have always enjoyed a close-knit mining relationship. A quick look at the figures reveals the hunger Canadian miners have for Mexican minerals. In 2015, a total of 75 percent of all foreign capital in the sector came from Canada, either via FDI or indirectly through the Toronto Stock Exchange. According to the Mexican Mining Chamber (CAMIMEX), 173 out of the 267 foreign companies operating in the sector, or about 65 percent, are Canadian. The US, the second best-represented nation, has just 44 companies.

“Canadian mining investment represents more than just monetary resources coming to Mexico,” says Pierre Alarie, Canada’s Ambassador to Mexico. “It is about creating jobs and prosperity at the regional level in areas where no other economic activity is available.”

One company that typifies this dynamic is Timmins Gold. The company, listed on both the New York and the Toronto Stock Exchanges, has corporate offices in both Canada and Mexico but focuses on gold exploration and project development in Mexico exclusively. Its one producing mine, the San Francisco project in Sonora, was planned for closure in 2016 but had its life extended to 2023 following the rally in gold prices. The company is hoping the Ana Paula development project will soon join San Francisco as a fully-fledged mining operation.

“We are currently completing a full feasibility study at Ana Paula, and we anticipate that it will be ready before the end of 2017,” says Timmins Gold President Arturo Bonillas. “There are metallurgical and geotechnical testing works being carried out in Canada, and we hope to begin construction of the mine in 4Q17 or 1Q18 with operations to commence during 2018.”

Timmins is not alone as a mining company with allegiances split between Canada and Mexico. First Majestic Silver, Argonaut Gold, Pan American Silver and Alamos Gold are all on the long list of Canadian metal producers with operations either predominantly or exclusively in Mexico. Despite added tax pressures placed on the mining sector in Mexico in 2014, there are no signs of this trend slowing. In September 2016, Ontario-based Premier Gold completed a US$122.5 million cash deal for Yamana Gold’s Mercedes mine. The mine produced over 34,000 silver ounces in its first month alone.

GEOLOGICAL POTENTIAL

It is not hard to understand why Canadian mining enterprises constantly seem to have one eye on Mexico. The wealth of unexplored geological potential in the country is welldocumented, and despite over 500 years of constant mining activity, Mexico’s mineral and metal reserves remain among the world’s strongest.

But given the vast array of metal and mineral deposits throughout Latin America and the world, Mexico’s reserves alone are not enough to explain this trend. Geographic proximity means that it is easier to move key talent from corporate offices in Toronto to support the mines on specific projects in Mexico, and since the signing of the North Atlantic Free Trade Agreement (NAFTA) in 1994, foreign companies have been able to invest in the sector without limitations. This can generate fantastic returns given the low operating and labor costs in the country.

Working in Mexico has also been made easier by the efforts of federal government institutions to encourage foreign investment. Bonillas points to improvements made by the Mexican Geological Survey (SGM), the body in charge of prospecting and mapping Mexican territory, to explain why Canadian mining companies continue to flock into Mexico

“The management of the mining registry in Mexico is now very efficient, and this undoubtedly helps attract foreign companies to the country,” he says. “A lot of the credit for this must go to the SGM, which does a fantastic job when it comes to target identification.”

INFLUENCE THROUGHOUT THE VALUE CHAIN

Canadian stakeholders are not the only ones to benefit from this unique relationship. Despite boasting strong mining skills honed over more than half a millennia, Mexican mining companies often lack the financial backing and latest technology required to efficiently exploit mineral deposits and convert them into profitable mines. This is where Canadian companies can offer a helping hand.

“Canada’s solid financial and legal system make our country the ideal place to raise capital for the high-risk exploration that ensures the future of the industry,” says Michael Harvey, Chairman of the Canadian Chamber of Commerce Mining Task Force. “We play a very complementary role to the large Mexican-based companies that are the core of the industry.”

Canadian money is not just useful for boosting the finances of fully-fledged mine operators in Mexico. It also influences junior exploration companies that need investment to advance early-stage projects. Telson Resources, with shares trading in Toronto but executives residing in Mexico City, is an example of the impact that Canadian money has throughout the mining value chain. In June 2016, the company secured a credit line of CA$10.5 million, funds that provided a vital lifeline to its Tahuehueto gold-silver project in Durango.

“We have a lot of connections with top executives in the mining industry, and fortunately they were attracted to our project and decided to invest,” says José Antonio Berlanga, President and CEO. “One of these investors forms part of a fund that had expressed a desire to enter the mining sector in Mexico, and it was through this fund that we managed to secure the credit line.”

Shackled by low precious metals prices, the Tahuehueto project had been inactive for the best part of five years. With this cash boost, Telson has commissioned a prefeasibility study and Berlanga has bullish predictions for the future.

“Assuming the study reveals the viability of a mine, we will begin construction immediately,” he says. “We are still making a few adjustments to the mine design, but this should not delay us too much and we hope to be in production before the end of 2017.”

AN UNCERTAIN FUTURE

Following the US presidential election, the political and economic spheres in North America are set for a period of uncertainty. President Trump has withdrawn from the Trans-Pacific Partnership and is threatening to do the same with NAFTA. This could go two ways for the Mexico-Canada mining love affair; on the one hand, Mexico could find itself robbed of many of the international trade partnerships that make it so attractive to foreign investors. On the other hand, further integration between Mexico and Canada might provide the perfect foil for US isolationism.

However this pans out, uncertainty in global markets usually results in a rally in precious metal prices. Against this hazy backdrop the deep-rooted, mutually-beneficial cooperation that Mexican and Canadian miners enjoy could play a vital role in the economy of both countries. Ambassador Alarie has confirmed the Canadian government’s commitment to working with their Mexican counterparts to ensure “an open and transparent business environment and responsible resource development.” Meanwhile, projects such as Telson’s Tahuehueto and Timmins’ Ana Paula demonstrate the commitment to the fostering this relationship.

“We are always looking for alternative sources of financing,” says Berlanga. “We already have a series of meetings lined up with Canadian investors who want access to the Mexican mining industry.”