Mexico’s Growing Importance as an Investment HubMon, 10/21/2013 - 14:28
Q: How would you describe Mexico’s current business and economic environment, and how well-positioned is the country when it comes to attracting investment?
A: In the current global economic environment Mexico has become a very attractive place for investment for two main reasons. Firstly, the financial crisis has primarily affected developed economies, leaving growth opportunities for countries like Mexico, and secondly, the countries with which Mexico has been competing during the last 10 years, the BRICs, have fallen out of favor. Mexico has positioned itself very well as a result of its sound macroeconomic performance and the fact that it has already paid the price of adopting a free market economic model. Even though the country has faced many problems, Mexico is now ready to receive an increasing amount of foreign direct investment, and the current business climate in the country is very favorable.
Q: What are the most important challenges for achieving economic development in the country?
A: There are still many obstacles to economic development. Security is the first one, as investment could grow even faster if there was no violence. The second obstacle has to do with the fact that from a microeconomic perspective the country is still lagging despite the fact that Mexico’s economy became very solid from a macroeconomic perspective in the early 1980s, when international standards recommended by the IMF and the Washington Consensus were adopted. The judicial system is slow, and simple matters like getting an invoice paid usually take a long time. Administrative processes are in general very complicated. The third obstacle is the workforce’s lack of adequate training. Perhaps the biggest problem Mexico faces is its low educational level. If that is solved, many other hurdles will disappear. There are other problems Mexico shares with many developed countries, such as an underfunded pension system and a national health system with insufficient coverage and quality. These microeconomic matters hold the key to growth.
Q: How would you describe the current availability of local financing tools for the Mexican mining industry?
A: Local funding is still heavily skewed towards banks, due to the relative inexperience of local institutional investors in funding mining projects. Local institutional investors must develop the skill set to perform due diligence on mining projects, or become comfortable investing through dedicated mining funds. Ultra Maris Capital facilitates both mining and infrastructure financing, and we can say that in neither is there a shortage of money. Looking at today’s domestic and international arenas, there are pension funds, insurance companies and sovereign funds, among others, that have large amounts of money ready to be invested. Furthermore, these entities are eager to obtain higher returns, given that their traditional investments in government bonds or in high quality corporate bonds, currently offer low yields. These financial institutions have a serious challenge in delivering what they promised to their retirees, policyholders or owners. They need to get higher returns.
From our point of view banks, especially international banks, are on course to becoming the least relevant players when it comes to funding mining projects. They are increasingly supervised by authorities, and they have to keep high capital and liquidity ratios, so for them investing in long-term projects is not a very attractive prospect at the moment. As banks have reduced their participation in funding the mining industry and other capital-intensive industries, long-term institutional investors have stepped in, from pension funds, insurance companies, and sovereign wealth funds, to dedicated investment funds. These investors are funding projects through private or public placements of shares or bonds, and we think this is the way that most funding will be done in the future.
Q: What level of involvement does Ultra Maris Capital Partners have in the Mexican mining industry?
A: We are very interested in facilitating institutional capital, given our role as a boutique investment bank. We are therefore advising these projects in their development and the preparation of the required documentation, including feasibility studies; we are actually engaged in the preparation of several feasibility studies. Our target clientele are mid-sized companies. These companies benefit most from our counsel, as well as funding connections with pension funds, insurance companies, sovereign funds and dedicated mining funds. For the mid- sized companies in our target clientele group the principal financial challenge is finding the equity required to make a funding package possible. Ultra Maris Capital’s service offers excellent added value in this respect.
Q: How can the risks of mining activities be mitigated to reduce the probability of clients being unable to meet their financial obligations towards investors?
A: In a mining due diligence process many scenarios are considered and risk models are evaluated. At the outset of the project, investors or lenders must decide where their comfort level lies, and to what extent they expect the project to be resistant to financial stress, especially given the volatile commodity prices and the increase in input prices over the course of the business cycle, and the impossibility of knowing how long each cycle will last. Risk mitigation, beyond a prudent level of equity, can involve using futures markets or commodity derivatives to eliminate or reduce price uncertainty, which poses the biggest risk in any mining project.
Q: What is the value proposition of Ultra Maris Capital?
A: We offer fully integrated funding services to our clients, and our value proposition has four elements, which distinguishes us from banks. First, we help the project secure a source of equity for a complete funding package. Second, we provide consulting services for the integration of the documentation package required for funding. Third, we provide support in any negotiation that must be done for the project vis-à-vis its sources of funding. Fourth, we have an extensive network of service providers to assist the project in the business, accounting, legal and technical realms.