Xavier García de Quevedo
President of Minera Mexico, President & CEO of Southern Copper, COO
Grupo México
View from the Top

Reinforced Focus on Copper and Zinc Production

Mon, 10/21/2013 - 16:12

Q: What have been the critical success factors that have allowed Grupo Mexico to grow into an important global player in copper mining?

A: Before 1995 Grupo Mexico was not a renowned copper producer, and its output consisted mainly of nonrefined metals. From that year on, we made the decision to integrate vertically in order to boost the company’s operation. The Group invested its efforts and capital in modernizing its copper and precious metals processing plants. This strategy led us to start producing copper rods, an essential primary material in the manufacturing of electricity conductors.

Given the cyclical nature of the mining industry we decided to diversify the business by entering into the railway industry, with the acquisition of Ferromex and later Ferrosur. This was an opportunity for us to balance our operations. Along with our ambitions to compete at the international level, this also led us to acquire new businesses abroad. We bought the mining companies Asarco in the US and Southern Peru Copper Corporation in Peru. Following this diversification we also shifted our focus towards generating long-term mining plans and the expansion of our reserves portfolio. Our reserves are now certified, and we are currently the copper producing company with the largest quantity of reserves in the world.

Q: What are Grupo Mexico’s investment priorities, and which role does the reactivation of Buenavista del Cobre play in your development strategy?

A: The investment program for 2012-2015, which has been approved by the Board of Grupo Mexico, totals US$11.5 billion. For 2013 our planned capital investments are US$3.4 billion. The construction of concentrator plants, SX-EW plants, and the expansion of the Buenavista del Cobre mine are the main projects for Grupo Mexico, and US$2.8 billion will be invested in these projects with the aim of increasing our annual copper production from 202,000 tonnes to 515,000 tonnes. The SX-EW plant will begin operating in 2014, with an annual production rate of 120,000 tonnes a year. In 2015 the new concentrator will be put into operation, which will produce 190,000 tonnes of copper concentrate a year.

Q: Grupo Mexico stands out for its productivity and efficiency. Which practices have enabled the company to optimize its performance in these areas?

A: Our strategy is based on achieving profitability through cost management rather than price speculation. Cost management is a crucial element for ensuring the profitability of our operations, and we constantly seek to become more competitive through cost reduction. We therefore conduct international benchmarking processes to best identify cost saving opportunities. Improvement opportunities that we have addressed through this strategy have been related to manufacturing processes, logistics, energy and water consumption, and maintenance of our equipment and facilities.

Grupo Mexico continuously monitors its productivity and optimizes the number of employees devoted to each of its operations. We are currently implementing an Enterprise Resource Planning (ERP) system in order to manage costs throughout all of our areas and production stages. A concrete example is the reduction of downtime due to maintenance services on our trucks. One of the many benefits we expect the ERP tool to bring is avoiding the duplication of our work in administration and transactions, by reorganizing services into one single entity and system, with the aim of optimizing our resources.

Q: How does Grupo Mexico manage its relationships with its staff and the communities surrounding large-scale projects?

A: Grupo Mexico has an internal competence-building program, and each of our employees must complete a certification course in his or her working area. In 2012, Grupo Mexico provided its personnel with over 80,000 hours of internal and external training. The reactivation of the Buenavista del Cobre mine has greatly benefited the surrounding communities, as Cananea’s resurgence has generated employment for over 6,000 people. We place great emphasis on integrating ourselves in the surrounding communities, by fostering employment and progress. Through our relationship with the communities we have also promoted gender equality within our ranks. We have had a lot of interest from women who want to join our team,which led us to develop training and skill-building programs for them and to integrate them into the company. These are responsible and brave women who we have trained and hired upon the completion of their secondary education.

The key factor to our success has always been our human capital. Our personnel are capable of conducting respectful, professional relationships with employees and with the communities with which we coexist. Evidently, Grupo Mexico’s resources and mineral reserves also provide a favorable foundation for the development of opportunities for the local communities. For example, this year we transferred an average of MX$400,000 (US$31,700) to each of our employees, through our profit-sharing plan. This is a consequence of the results our employees delivered, and through these rewards our employees thus increase their commitment to the company. Moreover, Grupo Mexico has a very marked focus on sustainability. Our responsible approach to environmental matters is widely recognized, for example by our inclusion in the Mexican Stock Market’s Sustainability Index. We have also received an Ethics and Values Award from the Mexican Confederation of Industrial Chambers (Concamin). Grupo Mexico also complies with the norms established by the Global Reporting Initiative, in which information across multiple sustainability indices are gathered and audited by a renowned international auditing firm.

Q: What is the expected impact of the potential introduction of a 5% mining royalty on the country’s competitiveness as a mining destination?

A: The Senate should take into consideration the fact that the mining industry already pays a number of taxes. Last year the industry paid MX$3.1 billion in taxes on concessioned land. It is important to recognize that in Mexico, besides the 30% income tax, mining companies also have many other costs such as 10% Statutory Profit Sharing, expensive electricity, as well as water rights. This last one is unique in Mexico, and it amounts to 1.5% of income tax for the group. There are various additional factors that legislators should consider in their analysis, such as the application of the Flat Rate Business Tax, which applies to mining but not to agriculture or fishing.

Finally, the country today needs more jobs, and mining as an industry has been one of the greatest generators of employment in recent years. We hope that the government will make a responsible decision. Companies like ours are ready to give our perspective.

Q: What are Grupo Mexico’s main exploration strategies to ensure its long term success, particularly in Mexico?

A: Our exploration strategy prioritizes quality over quantity. This is something that is evident in the management of our projects. The process is simple: as the exploration stage of an asset advances, the results are measured against a set of profitability parameters. If a project meets the criteria, Grupo Mexico invests in further advancement and development. Our exploration activity is conducted in a selective, strategic manner, in order to protect our capital.

This strategy has earned us a series of high-potential projects in Mexico. We are currently developing an underground mine in Angangueo, Michoacan. After the construction phase is completed in 2015, this mine will produce zinc and copper aggregates with partial silver content. Our Chalchihuites project, located in Zacatecas, is currently undergoing its feasibility study. It will produce zinc aggregates in the future. We are also developing a zinc deposit in Buenavista del Cobre. Thanks to these projects, we expect to double our zinc production during the coming years.

Q: What are the ambitions for the development of Grupo Mexico’s mining activities over the coming decade?

A: Grupo Mexico sees itself as a solid and trustworthy longterm mining producer. In Peru we have important projects to develop, including the expansion of two mines, as well as the Tía María and Los Chancas exploration projects. Grupo Mexico is currently exploring in Ecuador, Argentina and Chile, and we are evaluating opportunities in Panama. In the US we have been successful in investing and increasing our reserves at Asarco, and we have found some resources in the surrounding area. We are also expanding our Mission mine in the same way. We have come back to zinc, with the reactivation of mines such as El Gangeo, as well as with the Buenavista del Cobre mine. We want to be a solid and competitive zinc producer.