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Mexico: The new mining law and the changing scenario around mining (from IKN496)

You can rant or giggle at this blog's contents as much as you like, it's not where the real work goes on round these parts. This from The IKN Weekly IKN496, out on Sunday evening. I've been asked by a couple of subscribers to put it on the open blog and yeah, why not. Here you go.


Mexico: The new mining law and the changing scenario around mining
The main political risk news story out of the region last week is the very same we previewed last Sunday, a closer look into what we can expect from the new AMLO government for the Mexico mining sector. At the time last Sunday I expected to preview some of the potential negatives in the pipeline, but events overtook me and last week we saw a range of Mexico exposed mining stocks take steep dives on the political newsflow. Examples:

  • Fresnillo (FRES.L) down 15%
  • Torex Gold (TXG) down 15%
  • Southern Copper (SCCO) down 15%
  • MAG Silver (MVG) ( down 8%

However, not all Mexico exposed miners were whacked hard, or even at all, compared to the benchmarks. More examples:

  • First Majestic ( (AG) down 4%
  • Fortuna Silver (FSM) ( down 3.5%
  • McEwen Mining (MUX) down 1%
  • Gold Resources Corp (GORO) down 1%

And the reason for the drops? Let’s go to Bloomberg for its coverage, here a title line on Thursday November 22nd (5):

Mexico Mining Selloff Worsens as Concerns Grow on Law Proposals

Here’s another from Friday November 23rd (6):

Prospect of Harsher Rules Causes Mexican Mining Companies to Fall Even Farther

As for the content, this segment is a fair summing up of what English language business readers understood from the coverage:

Fears of tougher mining regulation in Mexico under incoming President Andres Manuel Lopez Obrador are taking over investor sentiment, with some of the top stocks falling for the third consecutive day.
Industrias Penoles SAB, Grupo Mexico SAB and Fresnillo Plc extended losses after Morgan Stanley downgraded the stocks on concerns that Mexico’s new congress is considering as many as 11 bills or resolutions that could materially impact mining companies operating in the country. On Tuesday, an initiative from Morena party Senator Angelica Garcia called for increasing surveillance of mining activities and giving greater powers to communities and the government.
“We believe Mexican mining equities will decouple from fundamentals for the foreseeable future given the heightened uncertainty around the regulatory framework,” Carlos de Alba, an equity analyst at Morgan Stanley, said in the report. “The risk ranges widely and could be material.”
Proposed initiatives include empowering the Ministry of Economy to declare certain zones as not viable for mining, and revoke permits and existing concessions that had a negative social impact. They also contemplate charging Mexican agencies with overseeing the social and environmental impact of mining activities.

Meanwhile, Mexico media channels were also on the case, but covered the story with a little more depth. As you’ll see that depth is important (and we should also recall that one of the objectives of Bloomberg reporters is to earn bonuses by publishing “market moving reports”). Here’s a report from El Sol de Mexico (7) from Friday:

Shares in the country’s biggest mining companies continue to be in free-fall since the November 15th initiative presented by the Movimiento Regeneración Nacional (Morena) (note: AMLO’s party) which has worried investors and this Thursday became headline political news

Yesterday afternoon the Morena senator Angélica García made the formal presentation of the reform initiative to the Mining Law. The modifications propose to “give teeth” to the Mexican Geological Service to be able to actively regulate concession tenders, the power to cancel permits and sanction mining companies that do not comply with the law. It also states that the Secretary of the Economy would be able to declare non-viable zones for mining operations or under conflict for negative social impact and thereby cancel concessions.”

It goes on and covers the same type of commentary from this-or-that pro-mining committee or chamber of commerce, but then we get to the bits that didn’t make it to the English language coverage

Albert Híbert, who will work with Alfonso Romo (note: AMLO’s Chief of Staff as from December 1st who is in his own right a very rich and successful Mexican businessman) in the Presidency, asked for people to remain clam as this was only a proposal which had not gone through the legislative process. “We need to discuss them, we need to look at them, precisely because of the damage they are causing in the financial markets”, he said.

This is no small point, ladies and gentlemen. For one thing the world seems to be reacting as if these items are already on the statute: Far from it, these are law proposals no more and no less, they will go through the Mexico parliament in normal style and be debated, approved, denied, adapted or altered to the pleasing of congress.  For another, just one soundbite from the centre of the upcoming new government (starting in less than one week from now) is enough to show that the executive is at the very least not 100% behind the plan and probably looking at it as a means to negotiation.

And add in this one, the law bill as proposed by the senator for AMLO’s Morena party (the reason people are so nervous of this, it would seem) is already seeing opposition from other senators of the same party! Step forward Armando Guadiana, Morena senator in the upcoming parliament who said (8) on hearing of the contents of the law bill that it was a shame the protagonists were proposing regulations in sectors that already had legal instrumentation and how they were generating uncertainty in the capital markets. He added, “We mustn’t go around changing laws just for the sake of it”, and said that he was already preparing his case to put before congress in order to vote down this Morena-led bill. Again, that’s no small thing right there.
In other words, the first thing to take away is that this isn’t a law, it’s a law bill. The second is that in order to make it through parliament and into law as stands, it will need plenty of support (as well as time). The third is that strategically place people inside AMLO party itself (and we haven’t even mentioned the opposition yet) are either reticent or outright against the contents of the law bill. So if this is starting to sound less scary to you already, I’m not surprised.

Which brings me to my next point about the changes to the mining scene that AMLO will bring, as they start with the man who has already seen plenty of coverage on these pages this year, Napoleón Gómez Urrutia, aka ‘Napito’ who was the exiled leader of one of the largest mining unions until winning his senate seat and coming into the government of AMLO. He’s now firmly installed in parliament and it’s no surprise (considering his background and ambitions) that he’s already seeing significant victories in the mining sector.

Two examples in the last few days: First the Napito union, known as Sindicato Nacional de Trabajadores Mineros (SNTM), won a significant pay increase at one of the mines under its majority union control. The privately owned Nueva Rosita coal mine in Coahuila last week agreed (9) to a 13% pay increase for its 120 workers (7% direct, another 6% in bonus increases tied to productivity) along with other benefits such as interest free loans to buy personal vehicles. These workers suddenly find themselves with increased political power thanks to Napito’s new position and obtained a pay rise well over the current rate of inflation (Mexico is running at around 4.8% in 2018).

Secondly, by secret ballot just a few days ago the Boleo copper mine in Baja California Sur (which was sold by the near-bankrupt Baja Mining, Greenslade et al, to South Korean capitals) voted (10) to change its main representative union from the one controlled by Germán Larrea (head of Grupo Mexico) to the SNTM of Napito. This is a significant victory not only for the increased power over mining, but over Larrea with whom Napito has been in bitter dispute for over a decade. This one must have been very sweet for him.

To sum up, we have three things:

1)     Sharp falls in some Mexico-exposed companies, but by no means all of them. What the big fallers have in common is a rocky history of either worker or community relations (often both).
2)     A law bill that will at best will have a difficult passage, more likely will be greatly adapted before ever making it to statute, or may even get stuck in committee forever.
3)     A senator in Napito, suddenly powerful and making the most of it via his union,grabbing power and negotiating better employment terms for workers in his union.

That’s what I believe we have here, ladies and gentlemen. The law bill is part of the Napito strategy now unfolding that has him taking control of the mining union scene in the country, getting better deals for his members and more power for himself. As I’ve mentioned on several occasions already, the days of lapdog-type unions at Torex (for one example) that saw its own workers rebel against their representation and demand that Napito’s union were allowed in are now over (see for example this July 12th post on the blog (11) entitled, “Costs will rise substantially at Torex Gold (TXG)”. This law bill looks like a stick to me, the carrot will be Napito and his people going to the mining companies with “You let our union represent the workforce and you then cut them a better deal than before, then your problems suddenly disappear.” One person’s negotiating position is an other's extortion, after all.

The new panorama for mining in Mexico is not wholesale militancy against the industry and the driving away of companies or new investment. What it is, however, are new deals that will see more of the cash generated go to its workforce. Or else. Therefore, what this means to investments in the country is that the sharp selling we saw last week is almost certainly overdone. However, I don’t think the nerves are going to abate in a matter of hours or days and none of the affected stocks are my idea of a rebound quickflip-trade. We may get more selling in the days ahead, but above all I doubt we’re going to get enough money sloshing back in to push price back in the very-near-term. On the other hand, we may eventually see the companies that weren’t hit hard last week as the bigger losers. As an example (and it’s probably unfair just to pick on one), Fortuna Silver at San Jose in Oaxaca has fought hard to keep its mine non-unionized or keep the union influence over its operations to a minimum. With the new strength of Napito and worker emancipation on the menu, they are an example (I repeat, there are others) of a smaller company that could see its operating costs rise meaningfully in dollar terms as workers demand a better remuneration package.

The bottom line is that I am less worried about the future of mining in Mexico than the panic sellers of last week. I’m also highly suspicious of the lack of depth shown by sell side analysts on the subject, especially those in the larger firms (Morgan Stanley and Citi are two of the large entities that helped spread the unalloyed fear last week) who should have the depth of knowledge to advise their clients better. However, I am not a knee-jerk buyer of the beaten-down stocks because a) the fear-mongering could go on for a while and b) even though the worst of the law project is unlikely to make it into law there is plenty of evidence to show that the Napito-driven mining scene in Mexico is going to see changes, first and foremost in better pay deals for workers. That means higher costs for the companies. And a final point; aside from the passive exposure via Sandstorm (SAND) ( which is something I am happy to take, the IKN Weekly ‘Stocks to Follow’ list has had no Mexico exposure for quite some time. That is not a coincidence, but in 2019 that may change once the new rules are established.