Mining in Mexico
Michael Schwartz looks at the impact of a new tax regime on this key mining jurisdiction.
Mexico produces more silver than any other country. Its Instituto Nacional de Estadística y Geografía (INEGI) has just recorded a total of 184Moz for 2014. Even allowing for a slight drop from 186Moz for 2013, last year Mexico produced 63Moz more than Peru. The other competitor in the top three is China, where the total for 2013 estimated by Thomson Reuters and company reports is 128.6Moz – although statistics can be difficult to fine-tune, as much of China’s production comes from a combination of small-scale mines and silver recovered from lead and zinc processing.
Mexico is, by tradition, a popular place for mining investment, but the Mexican Government has recently intervened in the shape of mining royalty taxes. Applicable since January 2014, two new taxes are posing their own challenge to foreign investors and domestic producers. An initial Congress bill proposing a 5% royalty has been replaced by a 7.5% royalty, although the International Tax Review states that as the royalty (commonly referred to as the Special Mining Duty) is deductible for tax purposes, the effective tax rate for investing companies is 5.25%.
The situation is complicated by the creation of an annual extraordinary fee intended to finance the clear-up of environmental impacts from gold, silver and platinum mining. The rate for this second tax is 0.5%, applicable to gross income from sales of the three metals. Once again, the tax is deductible, this time with a de facto rate of 0.35%.
Juan Chávez, an International Tax Services (ITS) manager at PwC, based in Mexico City – and who worked with PwC’s mining team in Vancouver – said to Materials World, ‘Before 2014, Mexico was one of the few mining jurisdictions without a specific mining tax or royalty – one of the reasons it was so attractive to investors. With these new mining duties, the tax burden has clearly increased for mining groups operating in Mexico.
‘On top of the mining taxes enforced in 2014, the mining industry has faced further changes to the Mexican tax regime, specifically in terms of allowed deductions. For example, until 2013 investments during the exploration and development stages were fully deductible in the year. Now they should be amortised over 10 years. In addition to the new tax environment, in 2013 and 2014 the metals’ spot price has not been the best, so mining groups have been very cautious regarding their overall expenses.
‘With all this in the mix, new foreign investment has decelerated and development plans for Mexican properties have deferred. That being said, one year after the tax reform, we have heard foreign investors recognising that overall Mexico still offers a great investment alternative, especially in comparison with other Latin American countries.’
One blunt note has, however, been sounded by Dublin-based Research and Markets, ‘The introduction of the mining royalty of 7.5% in 2014 has not gone down well with the miners and has the potential to limit the attractiveness of the industry.’
Fresnillo: a key player
Not only is Mexico the world’s largest silver producer but it also hosts Fresnillo Plc, the world’s largest primary silver company. The latter’s goal is 65Moz of silver and 750,000oz of gold in 2018, compared with this year’s targets of 45–47Moz of silver and 670,000–685,000oz of gold.
Mineral by mineral, figures for Mexico show little change for gold, silver and copper, but these overall totals conceal major variations from province to province. For example, Zacatecas, a well known and long-standing silver producer, hosted growth of 15.5% in 2014, but Sonora province, where silver is a by-product, underwent a decrease of 63.7% in the same period.
For gold, the year-on-year totals for 2014 revealed +45.9% for Zacatecas, but -26.8% for Guerrero and -16.7% for Sonora. There was a small consolation for Sonora, where copper output rose 5.6%.
Zacatecas boasts two highly significant Mexican silver mines, Goldcorp’s Penasquito which, with 25.8Moz last year, is Mexico’s largest individual producer, and Fresnillo plc’s Fresnillo mine (20.1Moz). In fact, the Fresnillo figure reflects the variations in ore grade during the mine’s long-standing life.
And yet, there is more to Mexican mining than silver. As may be expected, gold is also a crucial metal. Fresnillo LLC, for example, bases its core operations in the country – its six operating mines break down into open-pit gold mines (Herradura, Soledad-Dipolos and Noche Buena), underground silver mines (Fresnillo and Saucito) and a joint gold-silver underground mine at Ciénega (while five of the mines date from 1992–1997, the Fresnillo mine’s start of operations is listed as 1554 – Mexican mining has a very proud history).
Fresnillo sells its silver concentrates to Met-Mex Peñoles, located in Torreón México. Peñoles, in turn, mainly sells its products to Mexico and the USA.
Outside silver and gold
Mexico’s rich geological history has formed one of the largest concentrations of metals and minerals in Latin America. In addition to precious metals, it is a producer of copper, lead, iron, molybdenum, rare earths, mercury, uranium, boron, manganese, base metals, coal, zinc, germanium, tungsten, and antimony. For the most part, Mexico remains underexplored in detail, even though almost all provinces have mining operations, a fact confirmed by IntierraMaps in its most recent coverage of the country.
One state alone, Chihuahua, stresses the presence of 15 minerals within its borders, along with 16 major mining companies undertaking 149 mining operations. Chihuahua is in third place in terms of Mexican mineral production after Zacatecas and Sonora, and second place for foreign investment in Mexico. In addition, mining generates 4.1% of Chihuahua State’s GDP.
There is indeed life after silver in Mexico. Vancouver-based Capstone Mining Corporation operates the predominantly copper-hosting Cozamin mine just outside Zacatecas City (silver is also mined but as a by-product along with zinc and lead). Proximity to Zacatecas City means easy exploitation of existing transport, power, water, medical and educational infrastructure. Capstone is also keen to stress that Zacatecas State is geopolitically stable and that Mexico’s membership of NAFTA contributes to economic stability.
Cozamin itself is an underground operation with surface milling – operating throughput is 3,300t/d, processing ore with a grade of 1.74% copper. The underground mining method at Cozamin is either long hole stoping or cut and fill, the mined ore being brought to surface via either a shaft, or two production ramps. After processing through a three-stage crushing plant, ore is reduced in size and then sent to flotation, of lead and copper first, followed by zinc. The ultimate concentrates are trucked daily to the port of Manzanillo and onto overseas smelters for treatment and/or sale (silver from Cozamin has been sold in a streaming transaction to Silver Wheaton at US$4.04/oz until April 2017 when the silver comes back to Capstone).
Most Cozamin copper goes to North Asia. As Cindy Burnett, Capstone’s VP Investor Relations and Communications explains, ‘Cozamin’s proximity to Asia as the largest consumer of copper provides an advantage - rather than to the US, as no copper from Cozamin is sold into the US. Smelters in the US are located inland, making them more expensive to deliver to from our location in Mexico (compared to North Asia).
‘Copper in concentrate is typically traded as a commodity and any pricing differential typically comes in the form of discounts or premiums to treatment and refining charges. The premium or discount is usually associated with the copper content, precious metal content or deleterious elements in the concentrate. The copper concentrate from Cozamin is of standard grade (Cu content of 24–26%) but otherwise relatively free of deleterious elements, making it a desirable quality for blending with more complex concentrates.’
For the rest of 2015, exploration at Cozamin will include 18,900m of underground infill drilling to add certainty to the block model with the goal of potentially recovering some reserve losses identified in the 2014 pre-feasibility study. Surface drilling, which began in 2014 targeting previously untested splays, will continue in 2015 with 12,000m of surface drilling budgeted.
Alternative mining methods
Then there are the projects that do not involve conventional open-pit or underground mining. Cyprium Mining Corporation has signed an agreement with Minerales Nacionales de Mexico and Minera Potosi Silver (collectively referred to as Potosi Silver) to exclusively evaluate and process up to 50,000 tonnes of stockpiles from the historic Potosi Silver mine.
Cyprium’s chairman and CEO Alain Lambert describes his company’s recent achievement as, ‘A significant milestone for our company as we officially started the flotation process of the first 1,000t of stockpiles from the historic Potosi silver mine located just 42km from the Aldama plant.’
Potosi Silver Mine is located in the well-known mining district of Santa Eulalia in Chihuahua State. Discovered in 1707, its main commercial operations took place between 1925 and 1991. It is situated 42km from the Aldama plant, itself a 100t/d flotation plant located 20km outside Chihuahua City.
Cyprium has exclusive use of the Aldama plant on a variable cost basis. It will also work with other small miners in Chuhuahua State to secure more mill feed in anticipation of its planned increase in capacity to 200t/d. For the future, Cyprium intends to become a significant producer in Mexico, although not a purely toll miner – it will re-invest some cash flow from toll mining in order to develop its projects while minimising dilution.
And the rest?
Research and Markets has just published Base metals (copper, zinc and lead) mining in Mexico to 2020. The report emphasises that investments in new projects in 2013 represented 30.6% of all investment in Mexican mining and metallurgy, well ahead of the expansion and maintenance of existing projects.
In addition, the authors look at consumption against export statistics. Taking 2013 as their sample year, they note that Mexico's copper, zinc and lead mine consumption totaled 331,700t, 223,000t and 216,700t respectively, most originating from Sonora and Zacatecas. By contrast, exports of copper, zinc and lead ores and concentrates ran to 694,600t, 532,000t and 251,180t for the same year. Clearly, base metal mining contributes healthily to Mexico’s balance of payments.
While Mexico is well known for its dominant position among the world’s silver producers, its success with gold and other minerals should not be underestimated. Any effects arising from the new taxation structure are still too early to determine.