Jose Almodovar
Mining Leader
PwC Mexico
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View from the Top

Positioning Mexico in the Global Mining Industry

Mon, 10/21/2013 - 13:59

Q: What is the role of emerging markets and how is the position of Latin America evolving in the mining industry?

A: Emerging markets play a key role in the global mining industry. What is happening nowadays represents a unique opportunity for emerging markets, but they need to align their political systems and regulatory frameworks - this is vital for the development of Latin America. Some countries that have great mining potential are not that appealing because of the risks they pose for potential investors, mostly due to political instability and land ownership issues. There is nothing wrong with foreign investment as long as fair salaries and fair taxes are paid and measures are taken to create sustainable operations. Mexico understood this very well a few years ago, and as a result we are now very well positioned in the global market; so too are Chile, Brazil and Peru. There is still a long way to go before some of the other emerging countries in Latin America will reach a good position in the mining market and be able to significantly contribute to the development of their own economies.

Q: PwC currently audits 32% of mining companies worldwide. Why do they choose you over other firms?

A: PwC has been working in the industry for a very long time. Our firm has been paying a lot of attention to the way the industry has been developing. We have created a network, including the creation of the Mining Center of Excellence, located in PwC Toronto, which allows the company to be aware of and adjust to mining companies’ needs around the world. The mining industry is very complex, and we have invested a lot of time and resources in establishing a thorough understanding of how the industry works and how we can help to improve it. PwC has developed the working knowledge required to anticipate outcomes in different areas such as accounting, tax, legal and operations, which enables us to be proactive and dynamic and find the best solutions possible when we work together as a team with our clients.

Q: What is PwC’s perspective on current investment opportunities in the Mexican mining industry?

A: Mexico has a total geographic area of approximately 1,964,375 km2. It is claimed that only about 30% of the area has been explored, and according to INEGI approximately 60% of Mexico’s area has geological conditions that favor ore deposits. Nevertheless, only 4% of Mexico’s surface has been fully explored for ore deposits. In 2012, the Metals Economics Group found that of the 121 countries that received the largest amount of both domestic and foreign investment in mining exploration; Mexico ranked fourth worldwide behind Canada, Australia and the US. In terms of tax, it also found that Mexico remained one of the most competitive countries for mining investors in Latin America. Mexico is undoubtedly very attractive as a destination for foreign investment, which means that PwC needs to be ready to promote and respond to business opportunities when appropriate.

Q: What are the main factors that cause agreements in the mining industry to go wrong, and how does PwC avoid this from happening?

A: The main reason for this issue is that some mining companies are not getting the proper advice from financial advisory entities when making acquisitions, expanding their operations, or even when they are selling their companies to other corporations. Sometimes they do not ask for advice at all. The best practice when you are buying, selling or expanding is evaluating economic feasibility and complying with technical standards, as well as local and international regulations. The bigger the investment is, the bigger the consultancy firm or company hired to provide financial advice should be. This becomes more relevant when you consider the fact that in Mexico at the end of 2012 we had more than 600 projects at the exploration stage and approximately 1,100 expansion projects. Recent M&A activity has been substantial; the total number of transactions went up from 340 in 2009 to 495 in 2012. At PwC we have the financial, tax, legal and advisory capabilities to maximize profitability and mitigate the risks involved in these sorts of transactions, and when they are carried out by foreign parties we incorporate our international network to make sure all bases are covered.

Q: How does your company deal with the ever changing regulatory environment, and which solutions do you offer to your clients?

A: We help our clients to comply with their regulatory obligations. When acting as their auditors we follow procedures to assure our clients’ compliance with their main regulatory obligations. We also act as their advisors when the auditing is being done by another firm, and in that role we support our clients with a number of services, such as tax support on reviewing or preparing their income tax provisions, or legal advice on how to deal with land ownership issues. We are very well known worldwide for the abovementioned support services, most of which we have been providing for a considerable number of years. In the last five years we have also been assisting our clients worldwide in a number of areas related on the operational side of mining, such as cost reduction, operating a cost effective mine, avoiding cost overruns and delays and driving deal value in hostile and non-hostile environments.

The mining industry faces a confidence crisis. Low confidence in cost controls, return on capital and commodity prices are keeping industry leaders awake at night. To add to these concerns, the mining industry has recently stopped outperforming the broader equity markets. In response, miners are trying to rebuild the market’s confidence. There is a shift from maximizing value by increasing production volumes to maximizing returns from existing operations from improved productivity and efficiencies. Regaining investor confidence depends on how the industry responds to its rising costs, increasingly volatile commodity prices and other challenges such as resource nationalism.