Uncertainty Spurs Capital Retention, Slows Growth

Water and open-pit mining regulations, along with judicial reforms, are escalating operational risks and discouraging investment in Mexico's mining sector. Moody’s reported that as investors grow more cautious, companies are likely to hold onto a greater portion of their generated cash, putting new capital investments on hold.

Political uncertainty in the sector escalated when former president López Obrador introduced a new package of reforms in February, which included proposals concerning the judiciary, water, and open-pit mining. In mid-August, the Chamber of Deputies committee approved the proposal to ban open-pit mining, which jeopardizes 60% of the nation’s mining and metallurgical production. However, the initiative has not yet been fully debated in either chamber of Congress, indicating that it may not progress in its current form.

Moody’s highlights that the regulatory environment in Mexico poses significant challenges for robust companies like Fresnillo, rated ‘Baa2’ negative. The firm notes that Fresnillo’s higher operating costs reduce the benefits of rising gold and silver prices. Although the company’s 1.6 million concession hectares help mitigate near-term risks, its current projects are not expected to commence production until 2027-2030. Nevertheless, Moody’s anticipates that Fresnillo will achieve positive free cash flow as capital expenditure decreases significantly in 2024-2025.

Similarly, Southern Copper Corporation, rated ‘Baa1’ stable, derives approximately 60% of its revenue and EBITDA from Mexico through long-term concessions. The company also faces risks stemming from regulatory uncertainty. “The abrupt change in the judiciary and regulatory framework undermines business confidence, including foreign investment in Mexico, and creates barriers that limit the country’s nearshoring potential,” the report states.

As investors become more cautious about Mexico, companies are likely to hold back their cash flow, leading to hesitation in seeking new capital investments. While this strategy may help reduce uncertainty, it will also dampen long-term growth potential. Moody's predicts a decline in Mexico's economic dynamism, projecting growth of just 1.5% in 2024 and 1.3% in 2025, after a strong 3.2% increase in 2023.