Mexico Remains Safe Investment Jurisdiction for Mining

Q: What makes Metals Focus the best provider of precious metals information and consulting services worldwide?

A: Metal Focus is an independent precious metals consultancy that has employees located across the globe. We only focus on analyzing gold, silver and platinum group metals. Our people have decades of experience across all aspects of the precious metals markets. I have been working in the mining industry since 2009, in my early career I worked at mine sites in Australia as a geologist and then later switched to becoming an analyst. My team has similar backgrounds to this and this allows us to have a detailed understanding of how the mining industry works. One of our advantages is our specialization in precious metals and we provide very detailed and comprehensive information in this area. Metals Focus speaks to people throughout the value chain, from mining refining to the demand side with bankers, investors and buyers to cover the entire industry.

Q: What are the biggest changes that the Mexican mining sector has gone through in the past decade?

A: Mexico is an important mining jurisdiction, particularly for silver. Last year, the country produced around 200Moz of this precious metal, nearly double that of the next largest producer, China. Moreover, the country also has other great opportunities with other metals such as gold. In 2021, the country ranked as the eighth largest gold producer.

Despite its potential, the country has faced great challenges such as COVID-19 in 2020, which caused operations to be temporarily suspended. Although the pandemic continues, all mining companies have adapted their work procedures and introduced new protective equipment to operate without putting their workforce and local communities at risk. These changes that came after the pandemic have been one of the biggest transitions in the mining sector.

Other topics that have gained relevance are environmental, social and governance (ESG) issues. More than ever, mining companies must be held accountable for their social impact and their responsibility regarding tax payments. If they fail in any of these areas, mining operations could be shut down. In recent years, ESG performance has become a very important variable for investors and the public, especially due to rising concerns about the burgeoning climate crisis.

Q: What makes 2022 a great year for investors and miners to bet on Mexico’s mining industry?

A: We expect significant growth in silver production from Mexico in 2022 as several large projects ramp up operations. Among the companies expected to increase production the most are Gatos Silver, Fresnillo and MAG Silver with their Juanicipio joint-venture project and SilverCrest Metals.

However, mining companies are facing rising inflation, which is driving up the cost of fuel, electricity, labor and basically all overhead costs. Additionally, silver producers are affected by the drop in the prices for some of their metallic byproducts. Therefore, while we expect production to increase, we can expect the revenue-generating capacity of the sector to decline. The average cost of production in Mexico during 1Q22 was US$12/oz for silver producers, but the current price is around US$20/oz. So, despite rising costs, the Mexican sector will continue to be profitable, but to a lower degree.

Q: Why should the international community continue to see Mexico as a safe investment opportunity?

A: Mexico has several characteristics that make it a very attractive jurisdiction. First, due to its geology, the country has been a major producer of silver and gold, as well as other key metals like copper. Second, it has a well-established mining industry and legislation. Third, people have the necessary skills to construct and operate a mine.

If you compare that to other countries where the industry is not as established, you realize that it is a riskier investment. Therefore, even though the government has changed the mining law, the country remains more stable than others. Obviously, it is an issue for investors, as they want certainty and stability. However, the changes in mining legislation are something happening in other Latin American countries such as Peru and Chile, too. There is not much that investors and miners can do to deal with this uncertainty, other than thoroughly understand the changes and how they impact their mine or investment.

Q: Where do you see the greatest opportunities for mining companies in Mexico?

A: Silver is probably the most attractive precious metal within Mexico as it has a very good production history. Consequently, there is a lot of experience and opportunities already unlocked. It is a safe investment asset in Mexico.

Q: What is your outlook on the remainder of 2022 and 2023?

A: At the beginning of 2022, we saw that the global geopolitical situation deteriorate due to the beginning of the war between Ukraine and Russia. This caused an increase in the price of gold, as it is seen as a safe haven investment. However, since then rising inflation has led to policy-makers, in particular the fed, becoming more hawkish and hiking rates. This will eventually feed through to rising interest rates and increases the opportunity cost of holding gold, because gold does not generate interest. This acts as a headwind to the gold price and led to a falling price from the highs reached earlier in the year. We expect these headwinds to persist throughout the rest of the year and beyond. However, continued geopolitical uncertainty is expected to provide strong support to the gold price for the remainder of 2022 and into 2023. On the production side, we expect production to remain relatively flat in Mexico, with 125 tons in 2022 and a similar amount in 2023.

Meanwhile, the silver price tends to follow a similar trend to gold. However, unlike gold, we expect strong production growth from Mexico of around 15Moz this year and then 20Moz in 2023.

Q: In the long term, how do you see the positioning of the Mexican mining sector worldwide and what will be its greatest challenges?

A: We expect silver production from Mexico to increase in the future. This will not happen at the same rate as in 2022, but it will maintain its position as the world's leading silver producer for the next decade. Mexico is also expected to remain among the top 10 gold producers.

The risks will continue to be the government's policy toward mining and ESG factors. The latter will be crucial as ESG factors are not only being driven by mining companies, but also by consumers. I believe that in the next 10 years, there will be an increased need for transparency and action on ESG issues, particularly on climate-related issues. Despite the challenges, Mexico will continue to be a major player in the industry for years to come.