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A bold second half-millennium of mining.

A bold second half-millennium of mining

To encourage new development, Mexico is staging a second revolution led by President Carlos Salinas De Gortari - to improve and streamline its economic and regulatory climate. No longer will manana be an acceptable response.

This is crucial for an industry that is a world-class producer of 14 minerals from antimony to zinc. In 1990 alone, it provided mining exports valued at $1.56 billion (positive trade balance of $996 million), or 5.8% of Mexico's exports. More importantly, investment in mining is soaring.

Alfredo Elias Ayub, Mexico's Undersecretary of Mines and Basic-Industry provided detailed insight on changes in mining in an August 13 personal interview by E & MJ.

E & MJ question: What do you believe mining companies look for?

Ayub: "There are three elements: political stability, because of mining's capital intensity; mineral deposits; and a regulatory environment that fosters investment. Mexico has an advantage in having all three. Mexico has been politically stable for longer than any other Latin American nation; it has been over 70 years since the revolution. It has many rich deposits, after 500 years of mining we generally know what we have and what we do not have. We know that we will find many medium-size metallic deposits [including Ag, Cu, Pb, Zn, and Au]. We need to do a lot more exploration to find more of those."

E & MJ question: What is your sense of what mineralization remains to be found by explorationists? Ayub: "The experts say that maybe we've found 20%. We are also now finding a lot of valuable, non-metallic deposits like celestile [Sr for color television], fluorite [steelmaking], etc. especially in the north of Mexico. While some may say that some other countries have more favorable regulations, the other nations often do not have as much to offer in mineral potential."

E & MJ question: How have regulations and taxes changed in Mexico?

Ayub: "We don't fight change, and what we have put together has generated about twice [2.5X] the historic rate-of-investment.

"The first thing that we did was to make the industry more profitable by changing the tax base. When silver prices went up [in the early 1980s] we established a production tax, equivalent to the U.S.' "windfall profits" [oil] tax, of 7% [of gross] plus income tax. So the first thing that we did was to bring it down to international tax levels. Our industry is no more taxed than that of the United States or Canada. When we negotiated this deal with our industry, they agreed to reinvest all that money in mining, which they have been doing, about $2.1 billion in five years; the first year they invested $560 million - right on schedule."

[Ayub holds civil engineering degree and a Harvard MBA, has been a visiting professor of finance at Harvard, has served on several boards-of-directors, and has had a number of important government assignments before assuming his latest post.]

"The second thing that we did was to redress a very old grievance of the industry about the |national mining reserves' that were off-limits to development. We had over 5 million hectares tied up, and we're freeing up half of them - we've freed up 1.5 million and are in the process of releasing 1 million. We're getting bids for this land so that new companies can come in there. Simultaneously, we've increased the tax that companies pay for holding undeveloped land. It used to be so inexpensive to hold land that some companies had tied up huge concessions [areas of land]. The former tax was based upon the peso value of 1976 - with all the devaluations [since then] it amounted to nothing [in terms of today's peso]. We adjusted the figure to 1991 levels; companies are freeing up land. Before, the government had to approve any trades of mining concessions to prevent speculation. Now we're preventing such speculation by raising the cost of holding land. Today you can trade land and register it in the National Mining Registry; it has promoted investment in exploration. Now you can capitalize such investment without any government approvals.

"The third improvement is the simplification of the administrative procedures for mining. It used to be a very long and complicated process that might take as long as five years to acquire a mining concession - it would drive you crazy. Now it's just a matter of about six months to get the legal and technical details accomplished. Everything is now computerized so the process is simpler. "The fourth critical area is that of geological information. It is now publicly available; we've had a good national geological survey, but its work was not available [outside of the government]. You can see whatever you want to, and the data is being published on a state-by-state basis with all of the known deposits listed. "Last, what ties it all together, is the money. We did two things here:

* "We opened an $800 million line-of-credit at the National Export Bank - just for the mining industry.

* "The possibilities for foreign investment in mining have been made much more flexible. Investment in the past was essentially closed [open only to a minority position]; major companies that had previously had minority participation included Cyprus, Kennecott, Asarco etc.

"Now we allow 100% investment for exploration through a trust mechanism. And we allow 100% investment for exploitation for a 13 year period from commercial operation." E & MJ question: Is that after banks' completion tests are met, i.e. full production volumes/normal costs? Ayub: "Yes and, for a 13 year period, it's automatic; with a permit from the Foreign Investment Commission, a company has a 20-year period.

"These five factors, together, have brought back interest in the mining sector. Over the past decade the historical investment rate [in mining] was $200 million/yr, and this past year saw $600 million with another $500 million this year and next. Maybe a little bit more, since we don't regulate that much, we know of a lot of companies that come into Mexico by buying currently held concessions, so we don't have the full statistics. We know that Asarco has opened two offices in Mexico, Kennecott has opened an office, and Cyprus as well, usually for exploration purposes.

"So this is a panorama of what we have done on the regulatory basis. And, returning to your question, we're not trying to compete on a regulatory basis - not being more or less open than any other country. We're trying to do what we think that we have to do, but we know that we have the other two factors [mineral deposits and political stability] as well to offer [for development] which not every one can." E & MJ question: A recent issue of American Metal Market indicated some U.S. environmental organizations had filed suit against the U.S. Trade Commissioner regarding the proposed Mexico-U.S. Free Trade Act. What are the implications? Ayub: "Mexico is environmentally responsible; President Salinas recently closed an oil refinery in Mexico City. We are currently working on the environmental specifications. I think that we've done something that's going to be very good for the [mining] industry. We signed an agreement with our Ecology Department, the equivalent of the U.S.' Environmental Protection Agency [EPA]. The Ecology Department and Energy-and-Mines Ministry, together with the industry, will develop the regulations jointly. We didn't want to wake up one morning with regulations developed by some biologist. They agreed to do it this way on what is reasonable to protect the environment, which everyone is concerned about, while also permitting business to develop in a practical way.

"We've got a good process now; the mining ministry and industry have input and can discuss issues. As an example, environment people said, |you can't handle lead on the docks.' We said lead is handled everywhere, let's see how lead problems can be handled. We don't say no because it's lead. Let's see what can be done and what has to be done. We keep the lead concentrate moist [on the docks], so that it doesn't dry - and then it is ultimately removed by the consumer [consignee]. It's been very good to work cooperatively with industry and the [government] environmental staff. We don't want anyone making an analysis without a framework. We want the industry to know very clearly what is expected of it for compliance, and what it can do. We don't want industry to present a project, and then, without a framework, someone says whether it goes or not. We're working on a framework, and we think that will resolve that issue.

E & MJ question: For those less familiar with Mexico, what is the structure of Mexico's mining industry?

Ayub: "There are four very large mining companies that control about 70% [by total value] of mining production. And you have 10-15 companies, including the four, that account for 90% of output. In all, about 900 companies constitute the industry. So it's a very concentrated industry, one with large professional companies. We believe that it's easier to deal with environmental issues when you work with large, professionally managed companies.

"Now, what we'd like to see in the future - and what we don't have now - is a medium-size group of mining companies. We now have big ones and small, family owned ones. We would like to see one or two more large companies, which may involve large companies. And we would like to see more medium-size operations. We would like to like the small miners, with good deposits, to find partners - in or out of Mexico - with capital and technology. So then they can exploit their deposits much more effectively. We are actively promoting this. The small companies don't have the risk capital for exploration. Thus far medium-size U.S., Canadian, and Spanish companies have led the way in this involvement. We also need to develop medium-sized companies in the non-metallic minerals. Again, this has been happening - more than in the metallics. We now have a $100 million [revenue] company in celesite and another one that is a $60 million company in fluorite.

"We would like to see more risk capital for exploration, again by companies with high technology for exploration, capitalizing it in joint ventures with concession-holders. These are the measures that we have taken that we hope will promote further development."

E & MJ question: So, for a foreign company, the old bugaboo of being restricted to 34-49% ownership is no longer an issue?

Ayub: "That is correct, except for phosphate-rock, sulphur, and uranium." [There the consideration payable by joint ventures to government agencies or companies is limited to 2 1/2-3% of gross product value.]

E & MJ question: The uninformed reader might think that there are potentially contentious unions to deal with in Mexico, e.g. Cananea?

Ayub: "Cananea is a special case where owner and labor have had a long, acrimonious relationship. In general, the national mining union has recognized the need to be much more productive. And changes have been made in many large mines to increase productivity - they have resulted in more work for, and income to, the employees. What was difficult about the labor contracts were the losses [work practices] that prevented productivity. In general, it [the union] has been willing to change them [practices].

"As a result, with the low [metal] prices, we've only closed the very small mines. The large mines have been able to adjust to survive with these depressed markets.

"We are very concerned now about the silver inventories and their overstatement [the essence of what he said at a Silver Institute meeting was that silver inventories were overstated because half of the material was impure and not in an industrially usable form unless refined]. The reaction that I got from my speech at the Silver Institute [in Coeur d'Alene, Idaho in late July] has been absolutely amazing, you wouldn't believe it! I get faxes from all over the world from people who are saying that I'm right - that it's a mess - or that I'm wrong. About 80% of the responses say that silver has been manipulated for a very long time.

"We need to be much more serious about silver - production and inventories. We've been talking with the Silver Institute about hiring an independent and reputable consultant who hasn't a committed, or published, position on silver. Miners need to know the truth - whether to make investments [in capacity] or not. Most people in the industry recognize the need to put out a clear, credible set of figures on production and inventories. We're in the process of deciding who can really do that kind of work."

E & MJ question: Do you have any concerns about the |distractions' that eastern Europe may pose to the financial community?

Ayub: "In the beginning we thought that it was going to compete [with us] for resources. Most people know that investments in eastern Europe are going to take longer than [initially] expected. In fact, I have a good friend, and former diplomat, now with a European bank, who speaks fluent Russian. He recently visited Russia and found no legal framework on which to base a contract. Moreover, it's impossible to know where the Russian Republic itself is going. Accounting is all fouled up etc., etc. [This interview was conducted just before the recent turmoil in the Soviet Union.]

"In contrast, Mexico has had the same legal system for over a century. When Placer Dome joint ventures with [Empresa] Frisco it is easy, they both speak the same business language, technology, etc. No matter what the industry, a foreign company can find an experienced partner, be it mining, petrochemical, autos etc. [in Mexico]."

E & MJ question: What about availability of infrastructure?

Ayub: "The policy is to allow private enterprise to enter the infrastructure business. Just last week 2,000 mi of privately funded toll-roads were opened by President Salinas. We've made major progress in the areas of ports. The Port of Veracruz was a huge mess; its management has been turned over to private company. We're giving concessions to private companies to develop ports. So far it's been successful on roads, we hope it will be similarly effective for ports. Railroads will continue to be a problem for awhile; we're in the process of developing a policy for them. Electricity will not be a problem."

E & MJ question: What about coal, historically it has been confined to indigenous use, what is its overall growth potential?

Ayub: "Minimal, we're building electric-power plants on the coasts and we'll be importing coal for those plants. There will be open bidding for that market from: the United States, Canada, Columbia, Australia. When the program is finished, some years from now, about 9 million mt/yr will be imported for the new coastal plants. This is being done for the sake of diversification."

The following background information was gleaned by E & MJ from Reglamento de la Ley Reglamentaria del Articulo 27 Constitucional en Materia Minera, which became effective on Dec. 10, 1990.

Fideicomiso grants the economic benefits of equity ownership for companies joint venturing with Mexican organizations. The concept provides that project approval is automatic if:

* Fixed asset investment is less that $100 million and is funded from outside of Mexico,

* The site is not in three major urban areas,

* Foreign exchange flows are balanced within three years, and

* Governmental environmental requirements are complied with.

Even for projects requiring approval, the National Commission on Foreign Investment must act within 45 days of application. If there is no response in the timeframe, approval results.

E & MJ will continue to actively follow developments in this important mining nation for its readers.
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Title Annotation:Mexico's Undersecretary of Mines and Basic-Industry Alfredo Elias Ayub interviewed
Author:Phelps, Richard
Publication:E&MJ - Engineering & Mining Journal
Article Type:interview
Date:Oct 1, 1991
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