Labour Troubles Could Paralyze Grupo Mexico

Monterrey, Mexico — For Grupo Mexico (GMBXF-O, GMEXICOB-M), it is the best of times and the worst of times. As record copper prices and deep reserves helped the Mexico City-listed company post a US$1.5-billion profit last year and recover from a loss in 2003, a long-running feud with its workers’ unions has reached new lows and threatens to paralyze the company’s production.

After a 6-week strike at the company’s main Mexican mine last year, Cananea, the unit has again been on strike — since July — over pay and safety standards. Relations between the company and workers at the copper operation have become so bitter that neither side was able to hold talks for a new labour contract after the previous one expired on Aug. 27.

In addition, workers at Grupo Mexico’s zinc-silver-lead mine, Taxco, are on strike, and the company has decided the only solution is to permanently close the pit, given its low reserves. The company’s striking San Martin zinc mine could face a similar fate. In Peru, the Toquepala and Cuajone copper mines and the Ilo smelter, which the company runs under its Southern Copper (PCU-N) subdidiary, vowed to strike in early October. With Grupo Mexico’s copper production in Mexico already halved by the Cananea walkout, the Peru action could almost completely halt its overall 700,000-tonne-per-year copper production, an extraordinary feat given the high world prices for the red metal.

Grupo Mexico is holding out for a favourable decision by a Mexican court that could rule the Cananea strike illegal and force miners to reopen the mine and restart production. At presstime, a ruling was expected shortly, but every day that passes with no change at Cananea is bad news for the company. Grupo Mexico says it is losing US$2.8 million a day in core earnings and has lost more than US$250 million in revenues from the strike.

“We have already declared (force majeure) with some clients,” said Daniel Chavas, an executive at Grupo Mexico, at a recent press conference in Queretaro.

The strike could push spot copper prices higher on world markets if the company is forced to declare force majeure with all its customers, as clients will seek to cover the shortfall on the spot market. The news is also bad for Grupo Mexico because it seeks to double its production at Cananea to 438,000 tonnes by 2012 as part of a $4-billion investment to expand its operations.

Investors are not worried, however.

“A shortfall in world copper supplies mean prices will help Grupo Mexico overcome its production problems and investors still expect healthy profits from the company,” says Rafael Romero, an analyst at Scotiabank in Lima.

Despite a volatile market for investors, Grupo Mexico’s shares have doubled in price to 80 pesos (C$7.35) a share so far this year as the company’s outlook is strong. But Grupo Mexico’s continued labour woes do raise questions about its worker relations in an era of higher environmental and safety standards at North American mines, while pressure for higher salaries in the booming Mexican and Peruvian mining industries is growing.

Miners at Cananea say they want to renegotiate higher pay, despite a one-off US$30,000 bonus from Grupo Mexico in May that was linked to the company’s high profits.

But many say their real gripe is about safety. They complain that Cananea, Mexico’s largest copper mine and the world’s fourth largest in terms of reserves, lacks proper safety equipment such as fire extinguishers, and that many of its exit routes are silted up with rock dust and mud, with empty barrels and timber line strewn around the mine.

“Every day we risk our lives at Cananea. The company and the (Mexican) labour ministry want to send us to our deaths,” says Cananea union official Carlos Pavon, who adds that some 3,000 workers are on strike at Cananea — which was first developed in the 19th century — Taxco and San Martin.

For Grupo Mexico, safety standards have been in question since a massive explosion at its Pasta de Conchos coal mine, in northern Coahuila state, killed 65 miners in February 2006. Despite state investigators’ conclusions that the company and the Mexican government were responsible for allowing a deadly mix of methane, coal dust and oxygen to build up inside the mine, no one has been prosecuted. Grupo Mexico says the blast was a tragic accident.

At the heart of the problem for Grupo Mexico are years of bad feelings between the company and its workers’ unions. In Peru, employees accuse the company of failing to grant them a bigger share of the profits driven by high copper prices. In Mexico, the issues are more antagonistic and involve a power struggle over leadership of the national miners’ union. Its current leader, Napoleon Gomez, who inherited the post from his father in 2001, has won numerous pay raises for Mexican miners over the past six years, but has faced accusations that he stole $55 million from a workers’ fund. Some workers have tried to sue him. The previous government of President Vicente Fox failed to recognize him as leader. Gomez denies any wrongdoing, but has fled into self-exile in Canada, while continuing to communicate with the union. Cananea went on strike in June last year in support of Gomez, costing the company losses of 16,500 tonnes of copper-in-concentrates and 7,500 tonnes of copper cathode production. Many workers accuse Grupo Mexico of trying to divide the 73-year-old union.

In one positive sign for Grupo Mexico, workers at eight Grupo Mexico units, including La Caridad, voted in mid-September to split from the once monolithic union and form a new grouping, which was expected to be up and running as soon as October. Still, some Mexican labour experts blame the new government of President Felipe Calderon for failing to heal the relationship between Grupo Mexico and its workers, which is damaging for both sides. For the moment, anything more than a truce looks far off, as accusations continue to fly.

“We are not part of the problem,” said senior Grupo Mexico executive and head of Mexico’s mining chamber, Xavier Garcia. “We did not sue Mr. (Napoleon) Gomez Urrutia. His 7,000 workers did because (they accuse him of stealing) $55 million from them.”