Resilience vs risk in Mexico's mining sector

Friday, February 23, 2018

How risky is Mexico as a mining jurisdiction? It all depends on the location, according to Moisés Kababie, an analyst at London-based risk consultancy Control Risks.

The presence of organized criminal gangs coupled with rising social activism and other factors has led to increasing risk in the country's southern states, highlighted by the blockade at Torex Gold's El Limón-Guajes gold mine in Guerrero state, Kababie says.

In other parts of the country extortion and robbery is the main risk, but major thefts have fallen as companies have bolstered security measures, although this has come at a cost.

In addition, political uncertainty is ramping up ahead of July's elections, with the leading candidate, Andrés López of left-wing Morena party, issuing conflicting messages about his views on the sector.

On the bright side, Mexico's continued economic growth in the face of multiple challenges – including US plans to shake-up the Nafta free trade agreement – is a sign of the country's resilience.

BNamericas: What are the trends in risk for miners in Mexico?

Kababie: Risks vary depending on location. In southern states like Guerrero and Oaxaca, social activism has become a major component of risk, which combined with criminal organizations and a blend of other factors make it very risky.

We saw a really important example of this in Nuevo Balsas in Guerrero state where all the factors blended together and resulted in a blockade in place for more than two months [at El Limón-Guajes]. These risks are increasing in southern Mexico. NGOs are also strengthening their involvement with local groups which has made matters worse.

In the north in mining states like Zacatecas and Sonora, there is a risk, but more of common crime like extortion, with criminal groups approaching companies and asking for, not necessarily money, but a vehicle or gas or anything.

We keep seeing things like that happening, like vehicles used for transporting goods being stolen, but major thefts have actually decreased.

Companies have increased investments in security to make this less likely to happen.

BNamericas: How big a financial burden do security measures place on miners?

Kababie: It is becoming increasingly burdensome. Some companies transfer the risk through insurance, so that when a product leaves a mining facility it's not their problem anymore. The transport company takes care of the value of the goods.

Companies are doing all this to avoid this risk, but companies are spending more on insurance, besides all the internal security factors like physical security and workshops for personnel. It is a burden.

BNamericas: With elections approaching, how do you see political risk?

Kababie: The main presidential candidates have not proposed much regarding mining, apart from AMLO [Andrés López from the leftwing Morena party, who is leading in the polls].

AMLO has made controversial and contradictory statements about the industry. Sometimes he criticizes the sector, sometimes he supports it.

He just elected a controversial figure, Napoleón Gómez [leader of national mining union SNTMMSSRM] to become part of his party's senate team.

It's hard to know what's going to happen. In terms of risks, the fact he is a leftist candidate means he is probably going to support social and communal rights, which is a major issue we can foresee coming.

BNamericas: How do miners view AMLO's plans to bring back Napoleón Gómez from exile in Canada?

Kababie: Some companies can't believe it, but he is seen by some miners as a leader who has fought hard for their rights. But then again he has taken some really controversial actions that are not in the interest of the mining sector.

The mining sector is not going to be very happy to have this figure back following all these controversies.

BNamericas: With Gómez back is the mining union likely to become more assertive?

Kababie: It's really hard to say. Now there is an opposing union, El Frente, and many new miners are choosing to go with them because of all the politics involved.

BNamericas: What risk is there from the Nafta negotiations?

Kababie: Canadian companies, which have the largest share of mining activities in Mexico, often bring machinery to Mexico through the US, so any quotas, tariffs or taxes are going to be an issue.

Also, temporary workers from the US or Canada can easily come and work in Mexico under Nafta.

But the Canadian government is keen on not losing access to the Mexican market, so something will be figured out in case of changes to Nafta.

In terms of secondary effects, manufacturing is one of the major sectors that could be impacted. That will affect jobs.

As we have seen in Mexico, this can translate into increased crime, and major organized criminal groups see this as an opportunity to capitalize on social dissatisfaction, unemployment and anti-US sentiment and make things worse

This can affect mining companies, especially in the case of confrontations between major criminal groups. They are going to need financing and this is going to come from kidnapping and extortion, and mining companies are seen as a pot of gold.

BNamericas: What are Mexico's strengths?

Kababie: We have major advantages. The location of Mexico means it's easy for products to be transported all over the world, especially the US.

Mexico has shown some resilience. At the beginning of the Donald Trump administration Mexico's currency and investment was hit, but it is not like that now. Even with all the problems GDP growth has been sustained, although not at optimal levels.

Labor cost is a real advantage, and Mexico's labor law makes it easy to hire and fire.

It depends on the location. In many places you don't need to think about major organized criminal groups or corruption being a problem.

About the company

Control Risks is a specialist risk consultancy with a global network of offices, including in Mexico, Brazil, Colombia and Panama.