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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.

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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) (MAG.to) down 8%

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

  • First Majestic (FR.to) (AG) down 4%
  • Fortuna Silver (FSM) (FVI.to) 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) (SSL.to) 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.



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