By Christopher Rodwell
While sometimes overlooked by Australia, Mexico’s mining sector is receiving much stronger interest from Australian companies, across the value chain. The previous lack of significant co-operation is something of an anomaly. Australia and Mexico possess, separately, a rich history in the mining sector. The sector has been a great contributor to our respective economies. It plays a significant role in defining our national identity and in underpinning our prosperity. And, in the context of a growing appetite for stronger commercial relations, it appears inevitable trade and investment in the sector will surge in the next decade.
In 2016 Behre & Dolbear ranked Mexico’s mining sector as the fifth-most attractive country for investment in the world after Canada, Australia, United States and Chile. That might surprise some in Australia. The ranking relates to its rich endowment across a significant number of minerals, but also its growing success in production. It is the world's largest producer of silver, 8th in gold and 10th in copper. In fact, Mexico is the world’s top 10 producer in 17 minerals (it is also 2nd in fluorite and bismuth, 3rd in celestite, 5th in molybdenum, 8th in barite and graphite, and 10th in manganese). Further supporting the case for investment in Mexico is that it is significantly underexplored. According to Mexico’s geological survey, while 70% of the country possesses mining geological features, only 27% of this territory has been explored.
For Australian mining companies, there are strong prospects. And given the current commodity cycle and general rise in optimism in the sector globally, good reason to undertake a due diligence review of the market.
That review will reveal a few pertinent considerations. Early in its term, the current Mexican Government introduced reforms to taxes and fees for the mining sector, increasing the fiscal pressure on mining concession owners, exploration companies and mine operators. Issues around depreciation of exploration expenses and the introduction of royalties have been a particular concern for the industry.
Naturally, consideration needs also to be given to security and corruption issues. Not uncommonly these risks tend to have a local and regional dimension and need to be examined in that context. (BHP’s recent investment, albeit in the oil & gas sector, should be a lighthouse for these companies in confirming those binary considerations can be managed.)
In keeping with a global trend, the Mexican mining industry has also entered a period of significant restructuring. It is concerned with optimising processes and improving environmental and community management. Working with landowners, the ejidos, can be particularly challenging if not managed correctly. However, given Australia’s relative strength in community development and sustainability, such challenges are by no means insurmountable. (Notably, Canadian firms, numbering around 200 firms, have demonstrated that these challenges can be managed in order to derive value from investments in Mexico.)
So how can Australian expand its interests? There is renewed appetite from some of our larger mining groups in examining the market. South32’s participation in the recent mission led by Australia’s Trade, Tourism & Investment Minister, Steven Ciobo, earlier this month, is evidence of this. In addition, a handful of junior miners such as Azure Minerals are already active in the sector. For its part, Austrade is able to support these companies with initial introductions to key stakeholders in the sector in order to commence the process of evaluating market entry strategies.
Across the supply chain there has been solid growth in participation in the sector. Companies such as Orica have developed an increasingly strong foothold in the market, servicing most major projects, especially those managed by the significant local conglomerates. The total number of Australian mining equipment, technology and services (METS) companies has grown from only a handful near the start of the decade to more than 30 today. That is respectable, but there is the potential for much stronger representation given the scale of the market. Companies such as Gekko Systems and Austin Engineering offer good case studies on market entry.
Encouragingly, in a roundtable discussion on October 25 at Expomin in Guadalajara three recent market entrants, Pit-to-Ship Solutions, Hawcroft Consulting and Groundprobe reflected on outstanding success achieved in the past two years. All three companies are, as a result, bolstering their local presence in order to lock in the revenue growth in the market. This decision is critical. Too often Australian companies attempt to service the market from afar, a strategy that would be considered deeply flawed if applied in their home market and yet occasionally rationalised as acceptable in a business culture that, if anything, values relationships more, not less.
Our education and research providers could also consider the market opportunities available. Two key mining clusters in the country – in the States of Sonora and Zacatecas – have been especially co-operative with Austrade in supporting co-operation between our key institutions and it is imperative we extend this work.
While Australia does not perhaps have the type of representation in Mexico’s mining sector that befits the capability it possesses, the story is, overall, a positive one. Now is the time to seize the opportunity to expand. There is a critical mass of Australian companies in the market that, alongside Austrade, are able to share insights and experiences in the market and ensure our profile strengthens.