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Moody’s Local Aims to Democratize Market Through Customization

Carlos Díaz - Moody's Local
Director General


Fernando Mares By Fernando Mares | Journalist & Industry Analyst - Wed, 09/06/2023 - 08:54

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Q: How is your experience in Scotiabank helping as Moody’s Local Director General?
A:  I have a 25-year-long career in banking, having spent seven and a half years here at Moody's. At Scotiabank, I held the position of Managing Director of syndications for Latin America, where I covered diverse sectors, including retail, media, telecom, corporate banking and the mining industry over an extended period.

Furthermore, I played a pivotal role in collaborating with various political stakeholders in Mexico to organize the Mexico Mining Day in Toronto. This initiative aimed to connect all mining companies investing in Mexico and encourage participation from Mexican companies as well. 

My journey at Moody’s began by overseeing all commercial aspects for North Latin America. Leveraging my expertise in structured financing and corporate financial strategies, I bring a unique brand of creativity to Moody's, allowing us to engage clients adeptly and comprehend their precise risk rating needs. 

Q: What does the recent opening of offices in Mexico mean for Moody’s Local?
A: Moody’s has operated in Mexico since 2000 and Moody’s Local has been conducting local ratings since 2022. With Moody’s Local, we aim to democratize the local market. In the past, we used global methodologies to rate companies and using a correspondence table, translated the global rating into local ratings. These methodologies were developed specifically for local ratings. Now, with Moody’s Local, we house local analysts equipped with local knowledge and, more importantly, country-specific methodologies. This change provides accurate local ratings that genuinely reflect the reality of corporate entities in Mexico. This shift particularly benefits SMEs, as well as early-stage issuers, granting them enhanced access to debt markets. 

Q: From a financial perspective, what are the average results of mining companies operating in Mexico? 
A: In a nutshell, mining companies report a good performance. The main three companies operating in Mexico are Grupo México, Peñoles and Minera Frisco, just to mention companies involved in precious metals, although it is also worth mentioning the importance of base metals and other minerals. Grupo México, Peñoles and Frisco are serious, substantial companies. They have even formed strategic alliances, as is the case with Frisco and Goldcorp in Peñasquito and their acquisition of AuRico Gold in 2012. Overall, the performance of mining companies across different subsectors has been good and consistent.  

Moody's, in its recent publications from March 2023, changed the global perspective on the mining sector from negative to stable, mainly because of the macroeconomic stability of prices in different regions, based in Moody’s expectations of improving business conditions for the global metals and mining in the next 12 months, despite persistent risks for the industry such as uncertainties about growth in China and developing markets, and persistent general inflation. Normally, when we think about mineral consumption, we consider China, as it traditionally accounts for over 50% of mineral production and consumption. Given geopolitical factors, Mexico finds itself in an interesting situation due to nearshoring, which we believe will bring a boom in demand for minerals. 

The country is also not isolated from global phenomena. Beyond the fact that no new concessions have been granted, current concessions have been respected. What we are seeing is a post-pandemic increase in production with low inventory levels. This scarcity of inventory means that, depending on the type of mine and specialization, you can have higher production, which in turn can improve your financial performance.

If we consider other metals used for automotive production, like lithium and steel, for example, our forecast is stable and we foresee price stability in the future, as well. Precious metals are also experiencing growth. However, it is crucial to achieve greater efficiencies in mines to harness these prices. Major metal producers in Mexico are making local investments to streamline their production costs, which allows them to have good figures.

Q: What differentiates mining investments in companies listed on the NYSE or TSX from those listed on the BMV? 
A: Differences are mainly rooted in cultural factors, particularly between Mexican and Canadian investors. A key distinguishing factor is risk aversion but there are other considerations, such as country-specific contexts, that impact investment decisions.

When you provide a platform like TSX and facilitate new regulations and concessions, it creates an environment that enables companies in the exploration phase to efficiently raise funds from these markets. People do not expect immediate success in striking gold; they understand that mining investments are costly. TSX allows you to deduct and amortize your exploration expenses over time. Additionally, the Canadian government provides significant security in terms of concessions. If we add the fact that you can have some type of union in any of these countries, you start to understand why companies choose to list in specific countries over others.

It is about knowledge, clear rules of the game and a combination of factors that the Canadian market understands. In Canada, you can talk to large pension funds, many of which invest in these ventures. In this market it is not a taboo topic; people have access to investments without fear, with knowledge, clarity and protection, especially for small investors.

In the case of Mexican pension funds (AFOREs), things are different. These instruments were allowed to invest only in triple-A companies when they started but when the triple-A company issuances became scarce, they decided to broaden their scope. We have reached the point where we have discussed the need for AFORES to invest in long-term infrastructure projects, including the mining sector, which plays a significant role as it contributes approximately 3% of Mexico's GDP and generates 419,000 direct jobs and over 2.4 million indirect jobs. 

With AFOREs holding long-term savings, there is a capacity to create a specific allocation with defined percentages for financing not only for infrastructure projects but also mining companies. This is the direction in which we are heading, since we need to generate internal wealth within the country to facilitate future development.

Q: What can mining companies get from contracting Moody’s Local’s services? 
A: Our excellent service is backed and reinforced by the globally-known name of Moody’s, which is not only a brand but a comprehensive company with wide experience in several industries. Analysts at Moody's Local are based in Mexico. The experience, depth, stability and certainty we provide to the investment public in ratings are part of what we offer.

When talking about evaluating mining companies, we need to refer to Moody's methodology, which considers the size, revenue, proven and probable reserves and geographical diversification for potential uncertainties in concessions or union matters. Moody's offers companies with knowledge and support, guides clients with a specific understanding of all influencing factors, and does not overlook critical financial aspects, like interest coverage and operating cash flow versus debt. 

Q: What does Moody’s do to promote better practices and ESG standards in the mining sector? 
A: We understand that the development of countries is tied to environmental sustainability, as well as social and governance aspects. The mining sector is fundamental in terms of the opportunities it brings for the development of regions that are far from traditional economic centers and as part of their ESG efforts, companies have taken steps, such as building water treatment plants, creating educational centers and universities to boost development in their communities. Companies have also implemented programs to empower women in the region, turning them into skilled workers with highly-paid jobs of over US$2,000/month. This leads to orderly and sustainable development. 

There are shades of green in ESG compliance, however; it is not a binary matter. Companies must comply with International Capital Market Association (ICMA) principles, which guide our methodologies, but it is also necessary to carry out a proper assessment of how viable a project is in terms of ESG standards. I believe that if we can ensure that mining projects and investments meet these requirements, Mexico will advance in an organized, consistent, community-oriented and environmentally responsible manner.

Q: What are your perspectives regarding the development of a national lithium industry? What is Moody’s stance regarding the state-owned lithium company LitioMx? 
A: Mexico ranks ninth in lithium reserves. I believe we need to be measured in understanding how these lithium deposits will be exploited and where they are located or what level of investment is required to extract the lithium, since we are talking about substantial resources to map out the locations of these deposits and conduct exploration to determine their concentration and quality. The exploration and exploitation of lithium is a lengthy process that demands significant resources and extensive knowledge. Like any endeavor, it is one thing to discover the deposits and understand them and another to move on to production and operational phases.

At Moody’s, we always await real news and actual developments. We do not speculate on any form of rating or evaluation, as there is limited information available on these matters. Therefore, we will wait until this information becomes public, provided by official government sources. At that point, we would issue a comment based on facts. 

Q: How much does the company expect to grow in the mining sector over the next five years? 
A: The future appears to hold great promise. We have collaborated with mining companies for their cross-border ratings in bond issuance through the international market, including the 144A or REG S. We expect global growth to continue to slow from 2.7% in 2022 to 2.0% in 2023 before improving to 2.4% in 2024. In Mexico, local ratings were previously aligned with global methodology, but local firms might feel it did not represent the actual Mexican situation. However, with the release of Moody’s Local this has changed. 

Many of these major mining firms are, indeed, among the most reliable prospects in Mexico. They have qualified personnel, high production rates, strong margins, professionalism, environmental consciousness and appropriate policies. I am confident that Moody's growth will come naturally as more issuers approach us seeking analysis, feedback and the stability and certainty our opinions bring to the market.

We are excited about the future. Since May 19, 2022, we have significantly expanded our credit relationships from around 129 to around 240. We are becoming more important in various sectors, particularly in the corporate, financial and structured finance domains. There is every reason for mining companies to seek our services, whether for private ratings, indicative ratings or rating services for acquisitions. I envision a bright future where Moody's will play a crucial role in offering SMEs access to debt resources through bond issuances or the banking market. I strongly encourage companies to reach out. 

Moody’s Local is a ratings platform focused on providing credit rating services in local capital markets. With its global expertise, the company offers local ratings, research in specific sectors and tailored local products. Moody’s is the only Global Credit Rating Agency that offers local ratings with methodologies tailormade for the local market.

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