Mexico country mining guide - KPMG Global Mining Institute - February 2016 - KPMG International
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Mexico country mining guide KPMG Global Mining Institute February 2016 kpmg.com/miningamericas
1
Table of
Executive summary
Country snapshot 3
contents EIU (Economist Intelligence Unit) rankings:
ease of doing business
Type of government
4
5
Economy and fiscal policy 6
Fraser institute rankings 8
Regulatory environment 9
Power supply 14
Infrastructure development 15
Labor relations and employment 16
Inbound and outbound investment 17
Key commodities – production and reserves 18
Major mining companies in Mexico 20
Further insight from KPMG 23
KPMG global mining practice 24
Mining centers 25
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Mexico | Country mining guide 1
Executive summary
With a land area among the larger In recent years, Mexico’s Mining and Infrastructure industry are
countries of the world, and a temperate sector has attracted some of the deemed positive for the country, and
year-round climate, Mexico has large country’s largest foreign and domestic communicate the “pro-business”
reserves of accessible mineral wealth. investments. In 2014, investment in the stance of the government.
The country is the largest producer of sector was US$5 billion, and is expected
silver in the world. In addition, it ranks to top US$5.4 billion in 2015. Moreover, However, the country’s economy has
among the top 10-world producers investment is expected to rise in 2016, been affected by the following factors:
of gold, fluorite, bismuth, celestite, despite fluctuations in international
—— Inadequate infrastructure
wollastonite, lead, molybdenum, prices for most metals.
diatomite, cadmium, graphite, baryte, —— Over-reliance on the US economy
salt, gypsum, manganese and zinc.
Improving business —— High crime rates
Moreover, Mexico has vast reserves of
many minerals that remain unexploited.
environment —— Substandard education system
In recent years, Mexico’s business —— Uncompetitive Energy and other
Mexico plays a key role in the global environment has improved. This is
Mining industry, in terms of revenue, Public sectors
primarily due to its privileged access
production and reserves. The country to the US market, an increasing global —— Inflexible labor markets
is an ideal destination for mining network of free trade agreements
investment, ranking behind the US, In the past, the regulatory framework
(FTAs), an emerging middle class,
Canada and Australia in terms of for the Mexican Mining sector has been
and a large domestic market. The
investment attractiveness. protectionist and unfavorable to foreign
sectoral reforms, especially in Energy
Mexico
1st 15th 2nd
Mexico is the Mexico has a $1.29 trillion Mexico ranked second
largest producer of economy, ranking it as in the EIU regional
silver in the world the 15th largest ranking, which
economy in the world included 12 countries
from the Latin
American region.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
2 Mexico | Country mining guide
mining investment. However, in the 30 percent. Post January 2014, a mining
eighties, Mexico began to implement royalty equivalent to 7.5 percent of the
significant economic changes that concession holders’ income derived
continued over the following decades. from their mining exploitation activities
The regulatory framework was is being levied.
simplified to attract foreign investment
and, as a result, private investment
Addressing the problems
has become the driving force of the
Mexican economy. The Mexican government is now
focused on improving infrastructure.
The country has many infrastructure
A mining-friendly jurisdiction opportunities, primarily in the power
In the Mining sector, restrictions grid and road networks. The structural
on foreign ownership of Mexican reforms introduced by the Enrique Peña
companies have been removed. Nieto government is largely viewed
Mining-specific royalties and taxes as a positive step toward boosting a
were revoked in the nineties to sustainable economic growth.
attract international investment in
the Mining industry. With an estimated population of
approximately 121.7 million (July 2015),
Current law requires mining companies Mexico is the 12th most populated
to be incorporated under the laws country in the world. A lack of reform
of Mexico, include exploration or in the country’s labor laws has often
exploitation of minerals under their adversely affected the Mining industry.
corporate purpose and establish their Worker unions are strong in the Mining
corporate domicile within Mexico. sector, and frequently demand better
benefits and salary increases. Illegal
The country retains ownership of all work stoppages are common. Recently,
mineral resources and the government the Mexican government implemented
grants concessions to private mining some changes to the labor law that
companies for exploration and extraction. provides employers more flexibility in
hiring and firing workers. In November
In terms of taxation, mining companies
2012, Mexico’s Congress approved
in Mexico are treated similarly to
broad changes to the country’s labor
companies in other sectors. Corporate
law, to encourage small businesses to
income tax is levied at a rate of
hire workers.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Mexico | Country mining guide 3
Country snapshot
Mexico1
Location Mexico is located in North America that borders the
Caribbean Sea and the Gulf of Mexico, between Belize
and the US and bordering the North Pacific Ocean, between
Guatemala and the US.
Geography Mexico is a federal constitutional republic located in the
continent of North America. It is the 14th largest country
in the world by area.
Located at (23 00 N, 102 00 W), and spread over
1,964,375 square kilometers, Mexico borders the US to
the North, Belize and Guatemala to the south, the Gulf of
Mexico to the east and the North Pacific Ocean to the west.
Climate The climate in Mexico varies according to the topography,
from tropical to desert. It is hot and humid along the coast.
Inland communities at higher elevations are much dryer and
more temperate.
Population With an estimated population of approximately 121.7 million
(July 2015), Mexico is the 12th most populated country in the
world. Mexico’s population is relatively young with a median
age of 27.6 years. In terms of demographics, the country’s
population comprises indigenous groups and early Spanish
immigrants.
Currency The official currency of Mexico is the Mexican Peso (MXN).
Banco de Mexico, the country’s central bank is responsible
for providing domestic currency to the Mexican economy
and ensuring the stability of the peso’s purchasing power.
Average exchange rate in 2015 were:2
—— MXN15.8671: US$1
—— MXN17.7072: EUR1
1 CIA Factbook, accessed on January 29, 2016
2 Interbank historical average over January 1, 2015 to December 31, 2015 from Oanda, accessed on
January 29, 2016
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4 Mexico | Country mining guide
EIU (Economist Intelligence Unit)
rankings: ease of doing business
Within the EIU The country ranked second in the
regional ranking, which included
The government has made a good
start on tackling some of these
business environment 12 countries from the Latin structural flaws, by means of reforms.
ranking for 2015–2019, American region. Nevertheless, there remain certain
risks relating to their effective
Mexico ranked Mexico’s privileged access to the implementation owing to institutional
US market, integration into the
32nd amongst the latter’s manufacturing supply chains,
weaknesses and more adverse market
conditions in the Energy sector (the
82 countries, rising an extensive network of free-trade focus of the most attractive reform by
agreements and a large internal
one place from the market make it one of the most
far), as a result of the fall in oil prices.
previous ranking of attractive investment locations However, the country’s economy is
among emerging markets. still plagued by some problems related
33 in the 2010–2014 to infrastructure; reliance on the US
However, high input costs, an inefficient
period. labor market, insecurity, corruption and
economy; crime rates; education
system; uncompetitive energy and
a complex tax system (notwithstanding other public sectors; and inflexible labor
a 2014 fiscal reform) have slowed the markets.
overall economic environment.
Value of Indexa Global Rankb Regional Rankc
2010–2014 2015–2019 2010–2014 2015–2019 2010–2014 2015–2019
6.88 7.05 33 32 2 2
Note a. Out of ten
Note b. Out of 82 countries.
Note c. Out of 12 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic,
Ecuador, El Salvador, Mexico, Peru and Venezuela.
Source: Economist Intelligence Unit
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Mexico | Country mining guide 5
Type of government
Mexico is a federal The president is the nominal head of the
country and leads the executive branch
other courts and tribunals, including
district courts that oversee various parts
republic (also called and the armed forces. A direct popular of the country. The Supreme Court can
a federation). At the vote for a six-year term elects the
president, who cannot be re-elected.
rule on specific cases only, not on broad
constitutional issues.
federal level, the
The Legislative branch of the Mexican Mexico has 32 states and a federal
Mexican government government is bicameral, with the district, which constitute its
has three branches: chamber of representatives and the administrative divisions. The federal
chamber of the senate comprising district houses the federal government.
executive, legislative 500 and 128 members, respectively. Each state is considered a sovereign
and judicial. Members of the lower house serve for entity and is free to make its own
three-year terms, and senators serve constitution, with which it can govern
for six years. These two houses pass its relations with other Mexican states
laws, approve spending and budget but not with other countries.
bills, declare war on other countries,
and approve presidential appointments. The local level of the Mexican
government comprises more than
The Judicial branch of the Mexican 2,400 municipalities. Each municipality
government has a High Court, the has a president and a council.3, 4
Supreme Court of Justice and several
3 Wisegeek, accessed on January 28, 2016
4 CIA Factbook, accessed on January 28, 2016
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
6 Mexico | Country mining guide
Economy and
fiscal policy
Economy includes an overhaul of the taxing
system, cuts in government spending,
Mexico has a $1.29 trillion economy, and the liberalization of certain
ranking it as the 15th largest economy economic sectors such as energy and
in the world, and the 12th in terms telecommunications.
of power purchasing parity (PPP).
Based on these rankings, Mexico is Mexico is traditionally seen as a
a “middle power,” falling just short of commodities and manufacturing giant.
being a G7 economy and ranking as It has the largest proven silver reserves
an economic power. in the world, and the tenth largest oil
reserves. PEMEX, the state-owned
With its 125.4 million inhabitants, oil company, is one of the largest oil
the country’s GDP per capita is producers in the world, with revenues
approximately $10,348, ranking Mexico of approximately $130 billion.
firmly in the “upper middle income”
countries. Adjusted for purchasing Due to rising wages and less favorable
power, the GDP per capita is about 70 trade terms in other countries including
percent higher, at $17,145, which ranks China, Mexico recently gained
the country in the same league with competitiveness as an automobile
Turkey, Romania, and Brazil, but still exporter. Large automotive companies
far below countries such as the US such as Volkswagen, Toyota, Nissan,
($55,000) or Switzerland ($58,000). Ford, General Motors and Fiat Chrysler
have increased their production in
Economic growth is forecast to rise Mexico recently, or have announced
3.1 percent annually over 2016–2020, their intentions to do so.
slightly less than the 3.4 percent
annual growth in 2010–2014, the years Mexico’s membership of the North
following the global financial crisis American Free Trade Association
of 2008–2009. Before that, growth (NAFTA) has enabled the country to
averaged about 4–5 percent per year. become one of the largest trade partner
of the US. Mexico exports mostly
The government of Enrique Peña Nieto, manufactured goods, industrial goods
which came to power in December and automobiles. It has a positive trade
2012, has been pressing ahead with balance with the US, and consequently,
what has been seen by many as an has become one of the largest holders
“ambitious reform agenda.” This of US treasury bonds.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Mexico | Country mining guide 7
Mexico became the first Latin American structural reforms in 2013–2014, Monetary policy outlook
country to enter the Organisation including in the Energy, Education and
for Economic Co-operation and Telecommunications sectors. Persistent The Banco de México (Banxico, the
Development (OECD) in 1994. It was constraints on growth include lack central bank) will see its dovish stance
later joined by Chile. Colombia is in of competition in the internal market challenged by a weak peso, but will
talks to join the OECD as well. Jose and a deficient education system, as benefit from the historically low levels
Angel Gurria (a Mexican) is the current well as institutional flaws resulting in of inflation in recent months.
President of the OECD. rampant corruption across all levels of The monetary policy rate currently
government and limited progress in stands at 3 percent, and based upon
Mexico is the OECD country with the curbing high levels of crime.7
second highest degree of economic analyst baseline forecast, an expected
disparity between the rich and the poor, tightening cycle will be largely
behind Chile. The bottom 10 percent Taxation synchronized with that of the US.
on the income rung disposes of 1.36 However, Banxico is likely to delay
The corporate tax rate stands at
percent of the country’s resources, this if the economy continues to
30 percent, while the top rate of
whereas the upper 10 percent dispose underperform. On the banking side,
personal income tax was increased to
of almost 36 percent. Twenty-six overall private credit penetration
35 percent as part of the recent fiscal
percent of GDP comes from the remains low, as most central
reform. Depreciation allowances range
informal economy, a part of the government and state-level spending
from 5 percent to 25 percent, but
economy in which almost 60 percent is financed through the domestic
can be up to 50 percent on pollution-
of the workforce is active.5, 6 banking system, leading to some
control equipment. The value-added
tax (VAT) rate is 16 percent throughout crowding-out of small and medium-
Policy issues the country (a lower border rate has sized borrowers.
been eliminated); food products and
Conservative fiscal and monetary medicines remain exempt from VAT, This situation will improve gradually
policies underpin macroeconomic although a junk-food tax has been over the 2016–2020, owing to a recently
stability; however, the weakness of introduced for products with high passed banking reform that seeks
the non-oil fiscal revenue base and calorific content. Additional changes to increase lending through greater
the shallowness of credit markets to various tax regimes, which affect competition in the financial system.8
leave the authorities with few tools conglomerates and ‘maquila’ (domestic
at their disposal to boost demand. assembly for re-export) firms, have also
The pace of reform has accelerated come into effect.5
markedly under Mr. Peña Nieto,
with the adoption of transformative
5 World Economic Forum, May 5, 2015
6 CIA Factbook, accessed on January 28, 2016
7 EIU Country Profile accessed on January 28, 2016
8 Monetary policy outlook: EIU, published December 4, 2015
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
8 Mexico | Country mining guide
Fraser institute rankings
Economic freedom of the Survey of mining companies 2014
world 2015 report Mexico ranked 56th on Policy Perception The country has slipped down in
Among the 157 countries covered Index by the Fraser Institute‘s Survey of the rankings on the Current Mineral
by the Fraser Institute’s Economic Mining companies 2014. Mexico’s rank Potential Index, with a ranking of 31 (out
Freedom of the World 2015 Report, in the yearly survey of the index has of 122) in 2014 from a rank of 15 (out of
Mexico ranked 93rd, with a score of consistently deteriorated since 2010. 79) in 2010.
6.79 on a scale of 10.
This annual peer-reviewed report Figure 1: Mexico’s scores, Fraser institute’s survey of mining companies 2014
ranks countries, based on their
policies that enable 42 different Mexico’s scores, Fraser institute’s survey of mining companies
Current mineral potential and best practices
economic measures in the 60 1.0
0.85
mineral potential score, on a scale of 1
0.86
following areas: 0.9
58 0.78
Policy potential index score,
0.72 0.8
0.71
—— Size of government – 0.64 0.7
on a scale of 100
expenditures, taxes and 56
0.6
enterprises
54 0.58 0.5
0.53 0.51
—— Legal structure and security of 0.46 0.4
property rights 52
0.3
0.2
—— Access to sound money 50
0.1
—— Freedom to trade internationally 54.65 58.79 57.28 56.52 52.02
48 0.0
2010 2011 2012 2013 2014
—— Regulation of credit, labor and
Policy perception index* Current mineral potential** Best practices mineral potential
business
Note *: The Policy Perception Index is a composite index that measures the effects on exploration of government policies
Note**: The Current Mineral Potential Index is based on respondents’ answers to the question about whether or not a
jurisdiction’s mineral potential under the current policy environment encourages or discourages exploration. It assumes
current regulations and land use restrictions.
Note***: The Best Practices Mineral Potential Index is based on respondents’ answers to the question about mineral potential
of jurisdictions, assuming their policies are based on “best practices.” It assumes no land use restrictions in place and the
industry “best practices”.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Mexico | Country mining guide 9
Regulatory environment
In Mexico, the Mexican Mining Law, its various subordinate agencies, Foreign direct
originally published in June 1992, administers the country’s mining law,
regulates all mining activities. This with respect to concessions, allotments
investments (FDI)
federal mandate governs the use, and national mining reserves. Under Mexican law, mining concessions
expiration and cancellation of mining can only be granted by the Ministry
concessions. Under the law, all minerals Federal law regulates mining activities of Economy to Mexican nationals
found in the Mexican territory are in Mexico. Under Mexico’s Federal (individuals or companies), ejidos9,
owned by the country, and private Constitution, the direct ownership agrarian and Indian communities.
parties may exploit these minerals (essentially) of all minerals resides
(except oil and nuclear fuel minerals) in Mexico. The Federal Constitution To be legally qualified to hold title to a
through a concession granted by the sets forth the legal grounds for the mining concession, companies must be
federal government. organized under the laws of
Mexico and their corporate
While most of the
Mexican territory are owned by purpose must include the
key areas of essential the country, and private parties exploration or exploitation
infrastructure in Mexico of minerals.
are state-controlled, over
may exploit these minerals
the past two decades (except oil and nuclear fuel Foreign investment in
Mexico has modernized Mexican companies holding
its legal framework
minerals) through a concession mining concessions is
to allow domestic granted by the federal government. subject to the provisions
of the Foreign Investment
and foreign private
participation in transportation, electric involvement of Mexican entities and Law. Foreign investors are
power, water and communications individuals in mining exploration and permitted to acquire up to 100 percent
under privatization, concession and exploitation activities through mining of the capital stock of Mexican
public private partnership (PPP) concessions granted by the federal entities holding mining concessions,
schemes. These reforms have created government. as long as such investors agree with
an environment that is more conducive the Ministry of Foreign Affairs to be
to investment in infrastructure projects. Other laws and regulations govern treated as Mexican citizens in respect
specific mining-related matters, of their equity participation in the
The Ministry of the Economy exercises including the environment, water concession holder.
its authority on mining companies supply, labor matters, foreign
through General Coordination of Mines, investment, land use rights, use
which in turn relies on the General of explosives, etc.
Bureau of Mines. The Bureau, through
9 Ejido is an area of communal land used for agriculture, on which community members individually farm
designated parcels and collectively maintain communal holdings.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.10 Mexico | Country mining guide © 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Mexico | Country mining guide 11
Duties, taxes and royalties activities, financial costs and taxes. This and exploitation works within two
mining royalty is assessed in respect of years after the twelfth year of the
In terms of taxation, mining companies concessions already being exploited by effectiveness of the mining concession.
in Mexico are treated similarly to their holder and is payable to the federal These royalties are payable to the
companies in other sectors. Corporate government in January and July of each federal government in January and July
income tax is levied at a rate of calendar year. of each calendar year.
30 percent.
Additionally, holders of gold, silver or Furthermore, under the Mining
Any person seeking to obtain a mining platinum mining concessions must pay Law, holders of mining concessions
concession must pay application fees to an extraordinary annual mining royalty awarded pursuant to a public bid
the Mexican government. After granting (derecho extraordinario de minería) process must pay a royalty (prima
mining concession by the Ministry equivalent to 0.5 percent of all revenues por descubrimiento) or an economic
of Economy, concession holders are arising exclusively from the sales of consideration (contraprestación
required to pay mining duties during the such minerals. económica), during the life of the
life of the concession. Mining duties concession. The royalty of economic
are payable to the federal government Holders of mining concessions consideration are paid to the Mexican
in January and July of each calendar that have suspended exploration or Geologic Service (Servicio Geológico
year. The amount of mining duties is exploitation works during two years Mexicano) and a federal government
assessed based upon the size (number within an eleven-year-period from the agency in charge of conducting
of acres) of the mining lot and must be granting of the mining concession research and identifying the potential
paid in Mexican pesos. A concession would pay an additional mining royalty mineral resources of the country.
holder’s failure to pay mining duties may (derecho adicional sobre minería)
result in the cancellation of the mining equivalent to 50 percent of the This royalty or economic consideration
concession. applicable mining duties payable by is determined by the Ministry of
concession holders from the twelfth Economy on a case-by-case basis at
The Federal Duties Law (Ley Federal de year of the effectiveness of their its discretion, and is calculated as a
Derechos), which amended in January mining concessions. percentage of the invoice value of the
2014, and provides for an annual minerals extracted and sold under the
mining royalty (derecho especial de Such royalty is assessed based upon relevant mining concession.
minería) equivalent to 7.5 percent of the the size of the mining lot. Concession
concession holders’ income derived holders shall increase it to 100 percent Under Mexican law, mining duties may
from their mining exploitation activities of the mining royalty payable from the be paid by the concession holder or by
after permitted deductions, excluding twelfth year of the effectiveness of the a third party having an interest on such
investments different from those mining concession, if the concession payment.10, 11
made in connection with exploration holder has not undertaken exploration
10 Mexico Mining Legislation, ICLG, accessed on January 28, 2016
11 Latin Lawyer – Mining 2015, accessed on January 28, 2016
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Sustainability and In Mexico, mining companies must Regulatory authorities must approve
follow the environment regulations laid this environmental impact statement.
environment out by the Mexican Secretariat of Labor
Mexican environmental regulations (STPS) and SEMARNAT. Surface exploration activities generally
have become increasingly stringent over have a very low environmental impact.
the last decade because of international Mining companies must obtain If an exploration project conforms
agreements that Mexico has ratified, environmental impact permits from to the NOM-120-SEMARNAT-1997
including North American Agreement on SEMARNAT prior to any mining and (Norma Oficial Mexicana NOM-120-
Environmental Cooperation (parallel to exploration activities, and such activities SEMARNAT, 1997 [1998]), SEMARNAT
NAFTA), the UN Framework Convention are subsequently subject to several does not require a permit to conduct
on Climate Change low impact surface
and the Convention on work such as drilling.
Biological Diversity. Major mining companies in Mexico In practice, although
The country’s federal
have started to invest in auxiliary areas not required under
the NOM-120, many
government works of environmental responsibility, such as companies submit an
toward sustainable
development and
reforestation projects, environmental “Informe Preventivo”,
a report that states the
environmental audits and certification, and residual measures that will be
protection through the used by the company to
Ministry of Environment
management systems, among others. minimize environmental
and Natural Resources impacts.
‘Secretariat of Environment and Natural environmental permits from different
Resources (Spanish: Secretaría del offices with SEMARNAT, including With environmental issues becoming
Medio Ambiente y Recursos Naturales, water extraction, wastewater discharge key issues in the Mining sector,
SEMARNAT). and tailings disposal. SEMARNAT is introducing environment-
friendly policies for the industry. Major
SEMARNAT aims toward the following Under the Mexican Mining Law, mining companies in Mexico have
targets: concessionaires must adhere to started to invest in auxiliary areas of
federal environmental regulations, environmental responsibility, such as
—— Conservation of ecosystems and and their activities are subject to an reforestation projects, environmental
their biodiversity environmental review. All mining audits and certification, and residual
—— Prevention and control of pollution companies are required to prepare and management systems, among
file an environmental impact statement others.12, 13, 14
—— Management of water resources
for all extractive operations as well
—— Actions toward climatic change as non-standard exploration work.
12 Website of SEMARNAT, accessed on February 1, 2016
13 Website of Almaden Minerals, Fresnillo, and First Majestic Silver Corp, accessed on February 1, 2016
14 Mexico Mining Review 2015, accessed om February 1, 2016
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14 Mexico | Country mining guide
Power supply
As per the official data provided by as independent power producers (IPPs)
Secretaría de Energía de México in Mexico.
(SENER), Mexico had an effective
generation capacity of 54.4 gigawatts Mexico had 16,295 MW of total
(GW) and country generated an renewable installed capacity as of 2014,
estimated 258 billion kilowatt-hours predominantly in hydroelectric, wind,
(kWh) of electric power in 2014. This solar photovoltaic (PV) and geothermal
represents an increase of nearly capacity. Non-hydro renewables such
25 percent over 2005–2014. Power as wind, geothermal, and solar PV,
plants using fossil fuels provide 78 represented 3 percent of Mexico’s
percent of Mexico’s electricity capacity electricity generation in 2013. In 2014,
and generation. The Industrial sector Mexico had 980 MW of geothermal
accounts for 58 percent of Mexico’s capacity, ranking the country fifth in
electricity sales, while the Residential terms of global geothermal capacity.
sector is responsible for slightly more
Mexico also has a tremendous potential
than one quarter of electricity sales.
for harnessing wind power.Mexico’s
The National Energy Strategy outlined plan to increase its wind power capacity
by SENER and the Works and makes it the fastest growing wind
Investment Program of the Electricity energy market among the top 20
Sector (POISE) set up by CFE set a goal economies of the world.
to generate 35 percent of electricity
Several wind projects are in
from non-fossil sources by 2024.
development in Mexico’s Baja California
Non-fossil generation accounted for
and in Southern Mexico with the aim
22 percent of Mexico’s electricity
of boosting Mexico’s wind generation
supply in 2014.
capacity from 2 GW to 12 GW by 2020.
The state-owned Comisión Federal Mexico is hoping to achieve this goal by
de Electricidad (CFE) is the dominant encouraging $14 billion in investment
player in the Generation sector, between 2015 and 2018.
controlling more than three-quarters
With these developments, Mexico
of Mexico’s installed generating
is poised to become one of the
capacity. CFE also holds a monopoly
world’s fastest-growing wind energy
on electricity transmission and
producers; however, Mexico’s domestic
distribution. However, international
transmission infrastructure must be
companies, such as Mitsubishi,
updated if the country is to capitalize on
Intergen, AEC, Iberdrola, Transalta and
this increasing potential.15, 16, 17, 18, 19
Union Fenosa, are now participating
15 Website of SENER, accessed February 2, 2016
16 US Energy Information Administration – Mexico energy data and analysis, accessed on February 2, 2016
17 Energy Factsheet – US Embassy – Mexico City, accessed on February 2, 2016
18 CFE Annual Report 2014, accessed February 2, 2016
19 Renewable Energy Roadmap (REmap 2030) – published by SENER in May 2015, accessed on
February 2, 2016
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Infrastructure
development
Mexico currently ranks 64 out PNI is a comprehensive array of projects
of 148 countries in terms of that would cost the Public and Private
infrastructure, according to the Global sectors a combined total of about
Competitiveness Index of the World $600 billion. Under the program, Mexico
Economic Forum. Economists agree expects to upgrade its Transportation;
that Mexico’s prospects for becoming Communications Networks; Energy
a truly industrial economy will remain (power, oil and gas); Water; Health Care;
limited unless the country accelerates Urban Development and Housing; and
its construction of the roads, railroads, the Tourism Infrastructure sectors.
ports, energy plants
However,
and other physical
infrastructure
The country has infrastructure
essential in any many infrastructure development in
modern industrial Mexico faces
economy.
opportunities, various challenges,
primarily in power such as variable
The Mexican creditworthiness of
government focuses and road networks. state governments,
on improving which discourages
infrastructure. The country has many investors from participating in PPP
infrastructure opportunities, primarily projects. Another major challenge
in power and road networks. With this is the lack of multi-annual budgets,
goal in mind, the Mexican government which affects PPP contracts at the local
published its National Infrastructure level.20, 21, 22
Program for 2014–2018 (Programa
Nacional de Infraestructura 2014–2018
(PNI)), in April 2014.
20 US Trade and Development Agency infrastructure project guide, accessed on February 2, 2016
21 Mexico: Structural Reforms on Energy and Infrastructure. What’s Next? – EMPEA (Emerging Markets
Private Equity Association)
22 The Mexican mining industry: Pro Mexico Trade and Investment, accessed on February 2, 2016
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.16 Mexico | Country mining guide
Labor relations and
employment
Social and economic rights for workers mining, which in the past has led to
were written directly into Mexico’s unemployment and uncertainty.
constitution of 1917. The Federal Labor
Law and the Federal Social Security In spite of these factors, the Mexican
Law, which set the rules for labor Mining sector continues to be a prime
relations, labor unions and labor courts, target for foreign investment. Mexico
govern labor issues in Mexico. is a favorable destination for mining
investment, ranking only behind the
Although the labor laws – on paper – US, Canada and Australia in terms of
provide protection for workers and investment attractiveness. Moreover,
unions, their enforcement has been the country has vast reserves of various
questionable. Historically, labor unions minerals that remain unexploited.
and their negotiations have been These factors are bound to increase
controlled by the government as part the demand for skilled workforce in
of a larger strategy for economic the sector.
development. This has often resulted in
clashes between the government and In Mexico, nearly eight million
labor unions, due to the government’s young people are unemployed. The
focus on competition and foreign unemployment rate for the month
investment, which often comes at of November 2015 was 4.1 percent,
the cost of labor rights and working lower than 4.6 percent level registered
conditions. in November 2014.
In the Mexican Mining sector, labor Recently, the Mexican government
unions are strong, and frequently implemented some changes in labor
demand better benefits and salary law to give employers more flexibility in
increases. A lack of reforms in the hiring and firing workers. In November
country’s labor laws has often adversely 2012, Mexico’s Congress approved
affected the Mining industry. Illegal broad changes to the country’s labor
work stoppages are common in law, to encourage small businesses to
hire more workers.23, 24, 25
23 Comparative Labor Relations, Website of McGraw Hill Education accessed on February 2, 2016
24 Mexico’s unemployment rate falls to 4.1 pct. in November, Fox News, Published December 25, 2015
25 Mexican Labor Year in Review (2015) – Solidarity, accessed on February 2, 2016
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Mexico | Country mining guide 17
Inbound and outbound
investment
In recent years, Mexico However, according to the EIU, high
input costs, an inefficient labor market,
market conditions in the Energy sector,
due to a fall in oil prices.26
has witnessed a rise insecurity, corruption and a complex
Despite global market conditions for
in foreign investment tax system (notwithstanding a 2014
fiscal reform) have affected the overall minerals, mining investment in Mexico
activity, particularly business environment. has maintained its vitality.
from US investors. The government has made a good start In 2014, US$5 billion was invested in
the Mexican Mining industry, which
Most investors on tackling some of these structural
is expected to top US$5.4 billion in
flaws through reforms. Nevertheless,
prefer Mexico to there remain certain risks related to 2015. Overall, the industry invested
over US$17 billion over the 2013–2015
Brazil, due to its their effective implementation owing to
period.27
institutional weaknesses and adverse
geographical proximity
to the US market, Figure 2: Trend for inward and outward direct investment in Mexico (2010–2020 F)
low-manufacturing 50.0 45.2
costs, extensive global 40.0
37.7
41.1
Investment flow (US$ billion)
32.9
network of free trade 30.0 26.2
23.4 25.1 26.3 27.6
30.3
agreements (FTAs), 20.0
19.7
emerging middle 10.0
class and growing 0.0
2010 2011 2012 2013 2014 2015 2016 F 2017 F 2018 F 2019 F 2020 F
domestic market. –10.0
–8.3
–12.6 –13.1 –11.7 –11.6 –12.8
–20.0 –15.0 –13.9 –15.1 –16.4
–22.5
–30.0
Inward direct investment Outward direct investment
Source: Economist Intelligence Unit
26 Mexico Country Profile, EIU, accessed on February 2, 2016
27 Negocios ProMexico – May 2015, accessed on February 2, 2016
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.18 Mexico | Country mining guide
Key commodities –
production and reserves
Figure 3: Production level and percent share of global reserves of key commodities
in Mexico
Production level of key
commodities in Mexico28 Gold production
3,500 2.7% 2.7% 2.7% 3.0%
Mexico plays a key role in the 2.6% 2.5% 2.5%
% share of global reserves
global Mining industry, in terms of 3,000 2.5%
revenue, production and reserves.
In thousand tonnes
2,500
The country is amongst top 10-world 2.0%
producer of silver, fluorite, gold, 2,000
1.5%
bismuth, celestite, sodium sulphate, 1,500
2,450 2,560 2,660 2,690 2,800 2,860
wollastonite, lead, molybdenum, 1.0%
1,000
diatomite, cadmium, graphite,
500 0.5%
baryte, salt, gypsum, manganese
51 73 84 97 98 92
and zinc. 0 0.0%
2009 2010 2011 2012 2013 2014
Over the past few years, the
Mexico World % of global reserves
sector recorded a healthy growth,
which is expected to continue in
the future. Mexico is the world’s
largest producer of silver and a
Copper production
major producer of gold, copper and
lead. According to SNL Financial, 25,000 6.5%
% share of global reserves
6.0%
Mexico has increased its share of 6.0%
mining companies’ global exploration 20,000 5.5% 5.6% 5.5% 5.4% 5.4%
In thousand tonnes
dollars, from 4.6 percent in 2005 5.5%
to 6.6 percent in 2014. Key facts of 15,000 5.0%
Mexico’s production of commodities 4.5%
include: 10,000
15,900 15,900 16,100 16,900 18,300 18,700
4.0%
—— Mexico is the world’s largest 5,000
3.5%
producer of silver with production 238 260 443 440 480 520
of 4,700 tonnes in 2014 0 3.0%
2009 2010 2011 2012 2013 2014
(7 percent of global production
Mexico World % of global reserves
of 26,100 tonnes).
—— Mexico is amongst the world’s
largest producer of gold with
production of 92 tonnes in 2014
(2.5 percent of global production
of 2,860 tonnes).
—— Mexico is also a major producer
of copper with production
of 520,000 tonnes in 2014
(5.4 percent of global production
of 18.7 million tonnes).
28 US Geological Survey – gold, copper, silver; accessed on February 3, 2016
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Mexico | Country mining guide 19
Mexico’s share in
Silver production global reserves of key
35,000 7.3% 7.1% 8.0% commodities29
7.0% 7.0% 7.0%
% share of global reserves
6.9%
30,000 7.0% In 2014, Mexico was the largest
In thousand tonnes
25,000 6.0% producer of silver in the world.
5.0% According to the US Geological
20,000
4.0% Survey 2014, Mexico had an
15,000 21,800 23,100 23,300 25,500 26,000 26,100
3.0% estimated reserve of approximately
10,000 2.0% 37,000-tonnes of silver.
5,000 1.0%
3,550 4,410 4,150 5,360 4,860 4,700 In addition, Mexico is a favored
0 0.0%
2009 2010 2011 2012 2013 2014 destination for investment in the
Mexico World % of global reserves Mining sector, primarily due to its
geology, open investment regime,
low labor costs and a developed
Figure 4: Reserve level of silver and copper in Mexico, end of 2010 Manufacturing sector, which are all
expected to help maintain a positive
Reserve level of silver and copper in Mexico, end of 2014 business environment for the Mining
800 8.00% sector in future.
7.00% 700
700 7.00%
600 5.40% 6.00%
510
500 5.00%
400 4.00%
300 3.00%
200 2.00%
100 37 38 1.00%
0 0.00%
Silver (Thousand Tonnes) Copper (Million tonnes)
Mexico World Mexico’s % of global reserve
29 US Geological Survey – silver; accessed on February 3, 2016
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.20 Mexico | Country mining guide
Major mining
companies in Mexico30
Key domestic players
—— Industrias Bago S.A. De C.V. —— Grupo Simec S.A.B. de C.V.
—— Aluminio Laminado, S.A. De C.V. —— Fresnillo PLC
—— Grupo México S.A.B. de C.V. —— Industrias Nucleares Anodrac,
S.A. De C.V.
—— Estampados Y Electrosoldados,
S.A. De C.V. —— IUSA, S.A. de C.V.
—— Industrias Penoles S.A.B. DE CV —— Minera Capela S.A. de C.V.
—— Manufacturas Cifunsa, S.A. De C.V. —— Minera Frisco, S.A.B. de C.V.
—— Grupo Minero Mexico Internacional —— Cia. Minera El Cacho De Oro, S.A.
SA de CV De C.V.
—— IMSA Acero, S.A. de C.V. —— Tubos Iusa, S.A. De C.V.
—— Electronica Pantera, S.A. De C.V. —— Galvak, S.A. de C.V.
—— Met-Mex Penoles, S.A. De C.V. —— Quimicos Industriales PeIoles,
S.A. De C.V.
—— Altos Hornos de México, S.A.B.
de C.V. —— Plasver De Mexico, S.A De C.V.
—— Mexicana De Cobre, S.A. De C.V. —— Minera Penmont S. de R.L. de C.V.
—— Deacero, S.A. de C.V. —— ArcelorMittal las Truchas S.A. de C.V.
—— Industrias CH, SAB de CV
30 Methodology used for identification of mining companies:
— For identifying top mining companies in Mexico, Capital IQ was accessed to generate the list of companies operating in
Mexico in the following industry sectors: Aluminium; Diversified Metals and Mining; Gold; Precious Metals and Minerals
and Steel and Silver
— The list was filtered to exclude domestic Mexican corporations with revenue less than US$500 million (LTM February 2016)
— The list of foreign companies with operations in Mexico includes companies whose ultimate parent company are
headquartered outside Mexico.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Mexico | Country mining guide 21
Foreign companies with operations in Mexico
—— Agnico Eagle Mines Ltd. —— First Quantum Minerals Ltd. —— Nystar NV
—— Alamos Gold Inc. —— Formation Metals Inc. —— Pan American Silver Corp.
—— Aura Minerals Inc. —— Fortuna Silver Mines Inc. —— Primero Mining Corp.
—— Argonaut Gold Inc. —— Goldcorp Inc. —— Quaterra Resources Inc.
—— Aurcana Corporation —— Gold Resource Corporation —— Red Tiger Mining Inc.
—— Brigus Gold Corp. —— GoGold Resources Inc. —— Scorpio Mining Corp.
—— Capstone Mining Corp. —— Great Panther Silver Limited —— Silver Standard Resources Inc.
—— Cardero Resource Corp. —— Hecla Mining Company —— SilverCrest Mines Inc.
—— Castle Resources Inc. —— IMPACT Silver Corp. —— Southern Copper Corporation
—— Coeur D’Alene Mines Corporation —— Kimber Resources Inc. —— Starcore International Mines Ltd.
—— Sierra Metals Inc. (formerly Dia Bras) —— Lake Shore Gold Corp. —— Sutter Gold Mining Inc.
—— Elgin Mining Inc. (formerly Phoenix —— McEwen Mining —— Teck Resources
Coal)
—— Mercator Minerals Ltd. —— Timmins Gold Corp.`
—— Endeavour Silver Corp.
—— New Gold Inc. —— Torex Gold Resources Inc.
—— First Majestic Silver Corp.
—— Newmont Mining Inc. —— Yamana Gold Inc.
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.22 Mexico | Country mining guide
Mining asset life cycle
Asset Expansion Exploration Evaluation Development Production Closure
Asset Expansion Exploration Evaluation Development Production Closure
life cycle 1-2 years1 2-10 years1 3-6 years1 1-3 years1 10-50 years1 1-10 years1
life cycle 1-2 years1 2-10 years1 3-6 years1 1-3 years1 10-50 years1 1-10 years1
activity
Levelofofactivity
Commercial
Commercialbegins
exploitation
exploitation begins
Removal of overburden Commercial
Removal of and
overburden Commercialends
Level
and waste, plant exploitation
and waste, and plant
commissioning exploitation ends
commissioning
Expansion of
Expansion
mine of
and plant
Evaluate country Permit and license mine and plant
Evaluate
risks and country
market Permit and license
applications
risks and market
opportunities applications
opportunities Preliminary
Preliminary
Economic
Prospecting rights Economic
Assessment (PEA) Construction of
Prospecting Construction of Closure of
application rights Assessment (PEA) infrastructure Closure
application Competent infrastructure mine andofplant
and plant mine and plant
Search for Competent
persons report and plant
Design and Search for
commercially persons report
Design and
implement commercially Ongoing
implement exploitable Ongoing
market exploitable
resources rehabilitation
market
strategy resources rehabilitation
strategy
Bankable feasibility
Bankable feasibility
study (BFS)
study (BFS)
Pre-feasibility study
Pre-feasibility study
Time
Source: KPMG International, 2012. Note: (1) Estimated duration of stage in the mining asset life cycle Time
Source: KPMG International, 2012. Note: (1) Estimated duration of stage in the mining asset life cycle
Asset life cycle
(2) Reflects key activities only at each stage of the mining asset life cycle
(2) Reflects key activities only at each stage of the mining asset life cycle
Asset
Expansion Exploration Evaluation Development Production Closure
life cycle 1-2 years1
KPMG's
2-10 years
1
Asset
mining life
strategy
1
cycle
service offerings
3-6 years
1
1-3 years 10-50 years1 1-10 years1
Asset
Expansion Exploration Evaluation Development Production Closure
Your mining asset life cycle – How KPMG can help
life cycle 1-2 years1 2-10 years1 3-6 years1 1-3 years1 10-50 years1 1-10 years1
Strategy Your mining asset lifePerformance
Growth cycle – How KPMG can help
Compliance Sustainability
Strategic and Transactions Projects Operational Risk and Business
Strategy
scenario planning
Growth Performance
excellence
Compliance
compliance
Sustainability
resilience
Portfolio Market Project Operating model Statutory Community
Strategic and
management Transactions
entry Projects
development Operational
development Riskaudit
and Business
investment
scenario planning excellence compliance resilience
Portfolio Market Project Operating model Statutory Community
management
Scenario entry
Financing development development
Cost and audit
Enterprise investment
Energy, water
Feasibilities
planning and M&A tax optimization risk management and carbon
Scenario Financing Cost and Enterprise Energy, water
Feasibilities
planning
Strategy and
Tax M&A tax optimization
Supply chain risk management and carbon
Material
Financing Internal assurance
development structuring transformation stewardship
Strategy Tax Supply chain Material
Financing Internal assurance
development
People and structuring
Due Tax transformation
Business Forensic stewardship
Mine
change diligence structuring intelligence investigations Rehabilitation
People and Due Tax Business Forensic Mine
change diligence structuring intelligence investigations Reporting
Rehabilitation
Tax strategy Project Business
Integration Tax compliance and tax
and policy execution transformation
transparency
Reporting
Tax strategy Project Business
Integration Tax compliance and tax
and policy execution transformation
transparency
© 2015 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.Mexico | Country mining guide 23
Further insight from KPMG
An eye to the future – Adapting to change in a volatile mining industry
Growth in a time of scarcity: Insights into Mining
Managing transactions in the Insights into
Mining
kpmg.ca/mining
KPMG’s mining practice is committed
mining sector. to the industry and periodically publish
a series of insightful articles authored
NAV Multiples
This release from KPMG’s Global
Unique to the mining industry, NAV multiples are
Welcome to the first edition of Insight into commonly observed or applied in valuations. A NAV
Mining, a periodic e-newsletter focused on multiple is the multiple of the price of a mineral property
topics relevant to the Mining Industry. For as implied by the company’s market capitalization or
transaction amount to its net asset value (“NAV”). The NAV
today’s mining companies, dealing with
represents the net present value of the expected future
by leading KPMG Mining professionals
the complexity of the many challenges cash flows of the mineral property based on certain inputs.
facing the industry has become a way A company with a NAV multiple that is greater than 1.0x is
Mining Institute provide thoughtful
of life. said to be trading or priced at a premium to its NAV and,
conversely, one that is less than 1.0x is said to be trading or
KPMG’s mining practice is committed to priced at a discount to its NAV.
the industry and will periodically publish It is said that the premium relates to “optionality” and other
more intangible factors including, for example, a strong
a series of insightful articles authored by
and advisors. The articles are
management team. Also, many would say that a multiple less
leading KPMG Mining professionals and than 1.0x implied by the company’s market capitalization is not
advisors. If you have any questions, please
insights into implementing change
reasonable and thus that the mineral property is unfairly priced
contact your local KPMG representative or by the market. Accordingly, many sellers of assets are very
reluctant to proceed with any offers below NAV.
click here for a list of KPMG’s Mining
Several questions often come to mind and are asked: What are
leaders across the country.
the factors that can impact a NAV multiple? What is meant by
“optionality”? Does a NAV multiple of less than 1.0x make any
designed to inform and stimulate
sense? Can a NAV multiple be analyzed?
In attempting to understand NAV multiples and responding to
and the benefits of transformation
the questions posed above, it is first important to understand
how NAV is calculated. Almost invariably, the expected future
Lee Hodgkinson cash flows in a NAV calculation are based on the existing
National Mining Industry mine plan and a consistent discount rate across same/similar
Leader, Canada commodities. Also, a NAV calculation assumes that the
through standardization, outsourcing debate amongst those involved in
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
and divesting non-performing or core the industry. Topics in recent articles
assets. After several years of unprecedented layoffs in the include Incremental Innovation, Project Risk and the Role
industry, talent and resource management will be critical to of the Board, Exploring Linkages between Risk & Strategy,
future success. Key Questions on Risk Management and Net Asset Value
(NAV) Multiples.
We therefore stress the need for international operators to
have an effective mobility program that allows them to move
resources from where they are to where they are needed, in Mining M&A Quarterly
a cost-effective and efficient manner, creating a strong, mobile
Mining M&A
Quarterly
Newsletters
Newsletter
and global workforce. Our analysis of talent management Third Quarter 2015
kpmg.ca
This quarterly publication provides a
strategies highlights the benefits of having detailed, long-term current snapshot of the M&A market,
output targets and matching resource needs accordingly. providing a review of select key
transactions while focusing on the
Global Metals Outlook 2015 rationale behind those deals as trends
Global Metals
take shape. It highlights Canadian
Outlook
kpmg.com/metals
The past few years have been transactions, but set in the context
challenging for many metals of global M&A deals and trends.
organizations. Overcapacity and
sagging iron ore prices have led to
heightened pressure and intense
competition. Not surprisingly,
everyone is looking for new growth
opportunities while – at the same
time – remaining keenly focused on reducing costs.
In this report, KPMG International provides a comprehensive
overview of current trends, issues and opportunities in the
global metals sector. It includes valuable benchmarks as well
as forward-thinking advice and practical insights from KPMG
partners, industry experts and metals leaders.
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