In Mexico for the Long Haul

Q: As a brokerage and investment management firm, how do you select your investments in Mexico and how do you evaluate the country as a mining jurisdiction?
A: We have been in Mexico for a very long time, essentially since the change of the mining law. We are very comfortable here, understanding there are regional sociological challenges. But we have operated in jurisdictions like Guerrero and Sinaloa, so we can take these aspects into account prior to investing. Sprott is particularly well-known for precious metals – in particular for silver – and we have relatively deep exposure to Mexico. Our comfort in Mexico is related to the fact there is a long-standing mining culture in place but the attraction involves, most importantly, geological prospects. There is also an increased availability of not only skilled labor but also of national Mexican talent, and this is internationally competitive. The Mexican government seems to be on par with other governments in that it is mindful of the contribution made by mining to the national economy, which is very helpful.
The issues we see in Mexico are common around the world. The main issue is that the rents from mining and extractive industries have traditionally been channeled to the center – in Mexico’s case it goes to the federal government in Mexico City – while the localities have been subjected to the costs of mining without the benefits. Despite the fact that it is not our business to insert ourselves into Mexican politics, we try to now be part of the process whereby we as investors ensure that the benefits flow more equitably so we ourselves are working in jurisdictions that are largely free of local disputes.
Q: To what extent does Sprott get involved in the projects in which it invests?
A: We manage a reasonable amount of passive money, whereby we participate in a company at an arm’s length basis. But we have a very extensive project lending portfolio and, if the project lender has 65 percent of the capital deployed, by definition it becomes involved. We have been involved in a variety of projects in Mexico. In addition, we are one of the primary funders of generative exploration worldwide, including in Mexico. The nature of generative exploration, where the expectation is failure, is such that the person writing the check has to be intimately involved, at least with the development of the thesis and the process by which the thesis is tested.
Q: The majority of exploration companies in Mexico are listed on the TSXV. What are the benefits of sourcing private funding?
A: Private funding is very difficult to access for exploration, and the best source of private capital for exploration is probably from high-net-worth career mining explorers or from mining operators that are looking to outsource exploration. Mexico is fortunate in that it has five or six private individuals who are themselves eager participants in the Mexican exploration industry. This is something even the Mexican industry does not understand about itself. The fact that national investors are eager to fund these projects gives foreign investors like ourselves some confidence.
Q: How do you mitigate the inherent risk that comes from both exploration and jurisdictions that may not be free of security issues?
A: When operating in dangerous jurisdictions, the best we can do is to know who the main players are, and to let the authorities know the company is not implicit while assuring the local players that it does not pose a threat. There are jurisdictions where extortion and drug trafficking are problems that can make things very difficult. But the truth is that every industry would like to mitigate all risks, but we have to juxtapose the risk with the prospects. The answer to the question is that there is no answer; there are challenges in several parts of Mexico – and Mexico is not alone in this – where there are very real risks. We draw the line when we believe our people, whether nationals or expats, are at risk. We will not take that risk.